In the last couple of years, the labor market, housing market and corporate profitability have been strong, buttressing the US economy. But the weakening strength of the three factors could further slow economic growth and this would make it more difficult for the Fed to make more rate increases in 2017 if it moves first in December, said Mike Moran, head of economic research on the Americas at Standard Chartered in an interview with The Korea Herald on Wednesday.
|Mike Moran, head of economic research on the Americas at Standard Chartered. Standard Chartered|
“They were strong in 2014 and 2015, but since the summer of 2015, we saw the momentum where the factors starting to weaken,” he said.
“We think they can continue to weaken into 2017. This will make the Fed’s job more difficult. Inflation is still undershooting their target. From our perspectives, we think the Fed should have some patience if they really want to raise the rate.”
The US economic growth has been subtrend this year. Standard Chartered estimates the US economy to grow 1.3 percent this year.
The macroeconomist remains uncertain whether the US Fed is going to raise the rate in December.
“The market is certainly leaning in that direction. But we still think there is a chance that the Fed doesn’t move and waits for longer to raise the rate again.”
With “flat” global trade, global growth has been sluggish for the last couple of years. And one has to admit that global growth still looks challenging in 2017, the expert said.
“The US is quite slow, while Europe and Japan are quite sluggish, and China has been showing some signs of slowing, though not at a dramatic pace,” Moran said. “Overall, the global economy does seem to be facing some more headwinds in 2017. I don’t think the outlook is going to change materially or significantly next year.”
Low interest rates will remain for longer until there is a “meaningful” pickup of global growth, he said. For a meaningful pickup, there are important structural problems to be dealt with, such as high debt levels in many economies.
“With many years of quantitative easing since the global financial crisis, debt hasn’t come down,” Moran said. “I think debt is one of reasons why we have slow growth in typical parts of the global economy.”
Low interest rates have helped support growth but also helped push debt up, not down, which was the initial original intention of central banks.
“That is the policy dilemma many central banks are facing. Governments would have to spend more time trying to coordinate more optimal strategies.”
At times of high debt, a typical solution is to lower the interest rate, hoping it will increase growth and allow countries to grow out of debt problems. But due to persisting low rates for a longer period of time, the low rates are allowing debt to continue rising while slowing economic growth.
“I think the focus should be on capping debt to make it not grow at least above growth rate or inflation,” he said. “And try to promote pro-growth strategies that will not add to debt. About efficiency and investing in productivity.”
Debt is not the answer to more debt. Quantitative easing helped alleviate pressures from old debt, but it also has added to new debt in overall stockpiles, he added.
Moran, is head of economic research for the Americas at Standard Chartered based in New York. He oversees macroeconomic research on the US and Latin America. Moran joined Standard Chartered in London in 1999 after obtaining a master’s degree in economics from Cambridge University.
By Song Su-hyun/The Korea Herald (firstname.lastname@example.org)