Uneven global economy a test for central banks

Published on NewsOK Modified: May 15, 2014 at 4:54 pm •  Published: May 15, 2014
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WASHINGTON (AP) — The global economy is plodding ahead in fits and starts as the largest countries struggle to achieve consistent growth.

Europe is faltering again. Japan is suddenly surging. China is cooling. The U.S. is strengthening.

In the background, central banks are aiming to administer just the right amount of stimulus — not too much, not too little. Their efforts have yet to benefit many ordinary people facing job shortages and stagnant wages.

The unevenness of the global recovery was thrown into sharp relief Thursday, when the 18 European nations that use the euro reported unexpectedly weak growth for the year's first three months. A separate report said Japan's economy grew in that same quarter at the fastest pace in nearly three years.

Fresh data from the United States was mixed: Factory output declined. But fewer and fewer people are seeking unemployment benefits, a sign that solid hiring should continue.

In China, weaker trade and manufacturing have reduced growth, and leaders there foresee a further slowdown.

Most economists expect the differing outcomes across the world's major economies to add up to a modest expansion this year.

"The global economy is strengthening, though not quite as fast as many of us would like," said Jay Bryson, global economist at Wells Fargo Securities. Bryson expects the world economy to accelerate to 3.5 percent this year from 3 percent in 2013.

Key central banks have pursued low-interest rate policies to try to induce companies and businesses to borrow and spend. Their actions have helped lift stock markets in the U.S. and many European countries by inducing investors to shift money out of low-yielding bonds and into stocks.

Yet Japan's Nikkei index and China's Shanghai index have both declined over the past 12 months.

Here's how major economies are shaping up:

EUROPE

The 18-nation eurozone economy eked out just 0.2 percent growth in the first quarter compared with the previous three months, just half the rate analysts had expected.

The sluggish figure masked significant disparities: While Germany posted a comparatively healthy 0.8 percent gain, the Dutch economy shrank 1.4 percent.

The overall bleak figures raised pressure on Mario Draghi, president of the European Central Bank, to inject more stimulus into Europe's economy. Draghi hinted last week that the ECB could act as soon as next month to try to counter persistently low inflation and strengthen the recovery.

Economist Howard Archer of IHS Global Insight in London expects the ECB to cut its short-term rate to 0.15 percent from 0.25 percent. It could also impose a negative interest rate for money that banks deposit at the ECB, Archer said: The banks would essentially start paying for the privilege of parking their money at the central bank. Such a fee would likely spur the banks to lend more to households and businesses.

Other economists think the ECB could also buy bonds, a move the U.S. Federal Reserve and the Bank of England have undertaken. This would likely reduce longer-term rates and could encourage borrowing.

A key ECB goal is to lower the value of the euro compared with the dollar and other major currencies. That could boost exports and create more jobs.

It might also raise dangerously low inflation. Prices are rising at just a 0.7 percent annual rate. Inflation that low can stall growth by leading consumers to delay purchases.