Can monetary policies help prevent a global recession?
Monetary stimulus merely postponing the inevitable
Are we about to have a global recession? That was one of the many issues discussed at the recent Singapore Summit – a meeting of global policymakers and business leaders.
There was a mix of opinions on the subject, which was also reflected in a recent survey undertaken by Absolute Strategy Research.
They questioned more than 200 financial institutions and found 52% anticipated a downturn within the next 12 months.
But the likelihood of a recession within the next year is not certain. Recent actions by the US Federal Reserve and the European Central Bank (ECB) illustrate their policymakers' determination to support waning economies.
Yet the tools at their disposal are limited after a decade of monetary policy loosening. The Fed recently cut base rates by 25 basis points to between 1.75% and 2%.
The ECB cut its deposit rate from minus 0.4% to minus 0.5% and said it would resume quantitative easing again, buying €20bn of bonds per month.
Opinion on the committees of both central banks was divided, with some members arguing the steps were either not sufficient or too much.
As for the Bank of England's Monetary Policy Committee, they decided to keep their powder dry until there is some clarity on Brexit.
The bigger question that is now receiving a more robust public debate surrounds the effectiveness of monetary policy easing at this juncture.
After more than a decade of "crisis response" from global central banks, in spite of many of those years looking like far-from-crisis conditions, it seems reasonable and rational to ask if monetary easing is likely to help at all given the starting point of low interest rates and high debt burdens.
While it seems likely that in some cases economies could be stimulated for a time by lower rates, there are open questions surrounding the distribution of that benefit and therefore the long-term social and economic desirability of such actions.
Some research is now suggesting ultra-low rates may even be bad for economies.
Alongside central banks' dovish tone in recent weeks, there has been a tinge of annoyance that monetary policy is still shouldering much of the burden when it is long overdue that governments step in with fiscal stimulus measures, be they tax cuts or spending increases.
This was exemplified by Mario Draghi, the soon-to-depart president of the ECB, who said: "It is high time fiscal policy took charge."
I do not think we are about to have a global recession over the next 12 months given how determined policymakers are to prevent one, but any monetary or fiscal policy stimulus at this point is merely postponing the inevitable.
From an investment perspective, history suggests given current pricing the long-term return expectations across almost all asset classes will be low or negative.
But as always when market returns are negative and sentiment is weak, it becomes an attractive opportunity for those who have done their homework to pick up under-priced bargains as the baby is thrown out with the bathwater.
Martin Gilbert is chairman of Aberdeen Standard Investments
More on Markets
