By: DailyForex.com
Despite last month’s minuscule rate hike by the Fed, investors and bankers alike continue to question both U.S. growth as well as economic expansion across the globe. Economists see the current situation as totally flat and going nowhere—not strong enough to move forward with confidence and not weak enough to call for easing from central banks. They point to the rush away from stocks as an indication that investors are uncertain over economic conditions and prefer to pull out of the equity markets and play a wait and see game before jumping back in.
According to Bank of America Merrill Lynch, global equity funds surrendered a net $12.2 billion in outflows last week, the highest level of redemptions in five months and the seventh consecutive week of net outflows. The numbers are surprising as they came amid a market that is up nearly 6 percent from at least a near-term intraday low hit Feb. 11, as measured by the S&P 500.
Despite last month’s miniscule rate hike by the Fed, investors and bankers alike continue to question both U.S. growth as well as economic expansion across the globe
The U.S. economy appears confused. While consumers continue to spend freely and the jobs seem to be plentiful, there are other factors that are not performing as well such as manufacturing, exports and business investment.
Central Bankers Challenged
Central bankers are currently faced with several challenges. The most obvious one is globalization which seems to have slowed down to a trickle and this has a resulted in emerging markets taking a direct hit. Up till now, vigorous growth in developing markets helped generate an emerging middle class in these countries, which acted as a meaningful catalyst for global growth. But this will be difficult to keep up if the free movement of goods, capital and labor continues to suffer.
Another challenge facing central banks is the over extension of leverage. The world is mired in excessive debt and public-sector debt has been replaced with high levels of public, corporate and household debt across most of the world. Recent events in Chinese markets magnify concerns that excessive leverage could lead to another wave of global financial instability.
Economies are also being governed by too strict regulations. In an effort to prevent new financial crises, businesses have to comply with harsher directives put into place by banks and lending institutions. This has hampered investment and both personal and corporate economic activity has become tougher.
An additional challenge threatening the global economy is the increase in taxes. According to reports, in as a result of the global financial crisis, more than twice as many countries that are part of the Organization for Economic Co-operation and Development (OECD) have raised personal income taxes than have cut them. In addition to other negatives, higher taxes tend to reduce incentives for employing capital and labor and can prompt larger businesses to maximize returns for their investors by wasting resources in order to search for lower tax bases for their operations.
The last few years have witnessed the popularity of large emerging market economies but according to analysts if current trends hold up over the next 10-15 years, many of these will find themselves in the same situation as developed countries, facing a slowing growth in the supply of labor, higher dependency ratios, and perhaps a reduction in productivity growth.
The Federal Reserve, as well as other major central banks continues to face these ongoing challenges. The Fed’s small increase in rates begs the question of how long this will last before another change is needed, keeping in mind that several other central banks including the European Central Bank, the Bank of Canada, the Reserve Bank of Australia, all raised rates while in a global financial crisis only to cut them again to a point lower than when they started to hike. The question is if the Fed will take heed of the past and go in another direction or find itself making the same mistakes.