Analysis: Darkening Global Outlook and Central Bank Shifts Indicate Increased Turbulence – Reuters

By Leika Kihara, Howard Schneider, and Balazs Koranyi

JACKSON HOLE, Wyoming – Signs of sluggish growth and emerging risks to the job market loomed over a meeting of global policymakers at the U.S. Federal Reserve’s annual Jackson Hole conference. This gathering underscored a shift in monetary policy, as central banks in the U.S. and Europe consider the possibility of cutting interest rates.

While central bankers in the U.S. and Europe are transitioning their focus from high inflation to softening job markets, the Bank of Japan remains committed to moving away from decades of monetary support, especially in light of increasing signs of sustained price growth.

This divergence in policy approaches, alongside ongoing weakness in China, presents a challenging landscape for the global economy and financial markets.

The policymakers at the symposium were reminded of potential challenges when weak U.S. job data earlier this month fueled recession fears and triggered a market downturn, compounded by Japan’s unexpected rate hike in July.

Many analysts share the International Monetary Fund’s view that the global economy may see modest growth in the coming years, as the U.S. manages a soft landing, Europe experiences a growth rebound, and China steps out of stagnation.

However, optimism is tempered by uncertainties surrounding the outlook for a U.S. soft landing, stagnant growth in the euro zone, and sluggish consumption in China.

As major central banks move toward rate cuts, it’s still unclear whether these actions represent a normalization of policy or a preemptive measure to stave off further growth declines. This uncertainty may make global stocks and currencies vulnerable to significant fluctuations.

"We could see other episodes of market volatility as markets navigate uncharted territory," said IMF chief economist Pierre-Olivier Gourinchas, noting that major central banks are entering a cycle of monetary easing after tightening policies in response to inflation spikes.

Fed Chair Jerome Powell, in a highly anticipated speech, indicated a likely start to interest rate cuts while expressing concern over further cooling in the job market—a marked departure from his position during the inflation surges of 2021 and 2022.

Recent research presented at Jackson Hole highlighted that the U.S. economy might be nearing a tipping point where ongoing declines in job openings could lead to a more rapid rise in unemployment.

European Central Bank officials are increasingly leaning toward a rate cut in September, citing moderate price pressures and a notably weakened growth outlook. The euro zone experienced minimal growth last quarter, with Germany’s economy contracting and manufacturing in decline, largely due to weak demand from China.

Olli Rehn, a European Central Bank policymaker, noted that the rise in negative growth risks has strengthened the case for a rate cut at the upcoming monetary policy meeting.

In Japan, inflation data indicated a slowdown in demand-driven price growth, which complicates the Bank of Japan’s considerations regarding additional rate hikes. Despite a rebound in consumption during the second quarter, analysts remain uncertain whether wage growth will sufficiently offset rising living costs.

"The domestic demand is very weak," remarked Sayuri Shirai, a former Bank of Japan board member. "There’s little economic justification for raising rates."

Concerns are mounting with regards to China, which is approaching potential deflation and grappling with a prolonged property crisis, rising debt, and weak consumer confidence. Weaker-than-expected economic growth in the second quarter prompted unexpected interest rate cuts by China’s central bank and may lead to a downgrade in the IMF’s growth projections for the country.

"Weaker growth in China has repercussions for the global economy," said Gourinchas. Additional signs of slowing growth in the U.S. and China could pose risks for manufacturers worldwide that are already under strain from tepid demand.

Recent private surveys indicated that factories faced difficulties in July across the U.S., Europe, and Asia, raising concerns about a fragile global economic recovery.

For resource-rich emerging economies such as Brazil, a slowdown in China could impact metal and food exports while potentially easing inflationary pressures through lower import costs. Brazilian central bank Governor Roberto Campos Neto remarked at the closing session of Jackson Hole that "the net effect depends on how much the deceleration is."