It has kept banks afloat, let corporations build large cash reserves and restructure debt and, arguably, staved off a worldwide depression. But the ultimate aim — strong and self-sustaining growth in the world’s core industrial economies — remains out of reach, and analysts are wondering whether central banks are at the limits of what they can do to help.
For three of the four central banks involved, their local economies remain in recession or have flat-lined despite years spent in crisis-fighting mode. New data Thursday showed that economic output in Europe fell more sharply than analysts expected at the end of last year, with gross domestic product in the 17-nation euro zone declining 0.6 percent in the last three months of 2012, compared with the prior period. Growth in Britain was zero percent, while Japan’s economy contracted 0.4 percent at the end of the year.
This stagnation follows a historic run in which $5.5 trillion has flowed into the global economy from central banks in the United States, Japan, Britain and the euro zone. “This is a very unique situation, and we cannot exclude that we are overtreating the patient,” said Domenico Lombardi, a former Italian board member of the International Monetary Fund and now an analyst at the Brookings Institution. “There has been huge liquidity pumped into the system, but only a fraction translates” into economic support for businesses and households in those economies.
“Each successive effort at quantitative easing has had diminished returns. There are limits, and we are probably at the threshold” where more central bank action could do more harm than good to the global economy, said Timothy Adams, managing director for the Institute of International Finance, a trade group representing the world’s major financial institutions.
The paradox of a cheap money/ slow growth world will be at the center of talks this week in Moscow among finance and central bank officials from the Group of 20.
With all of the major economies struggling to grow, the rest of the world has become concerned about dwindling options. Many of the traditional crisis-fighting tools are off limits. Governments already have high levels of debt, making officials hesitant to borrow and spend in hopes of boosting jobs and growth. Structural changes to economies in Europe, Japan and the United States could take years to fully understand and longer to address. Interest rates — the traditional means for central banks to speed or slow the economy — are already near zero, leaving no room to cut further.
That has left central banks to rely on a variety of methods to try to boost economic growth, by, in essence, making money and loans easier to get.
Major currencies such as the dollar, euro and yen, however, don’t stay at home. They circulate around the world as the fuel for the international monetary system. Developing nations in particular argue that the policies pursued in Washington, Tokyo and elsewhere are driving up prices in other markets, making stocks and real estate more expensive, increasing the value of local currencies and perhaps setting the stage for another round of problems if the process gets out of hand.