Global economy needs more time for recovery

LONDON—The world’s top two central banks have administered extra-strong monetary painkillers, but the global economy will still need a lot more time to recover from its thumping debt hangover. Financial markets were euphoric after the Federal Reserve surpassed expectations and promised on Thursday to keep the money taps fully open until the US labour market makes a sustained recovery.

The European Central Bank had already impressed investors a week earlier by pre-announcing unlimited, albeit conditional, secondary-market purchases to bring down sky-high yields on bonds issued by struggling euro zone members such as Spain. Now it’s time to come down to earth. Surveys due this week are likely to show why, in the words of Stephen Cecchetti, the chief economist of the Bank for International Settlements, there are no grounds for complacency.

Global financial reforms are not yet complete. Southern Europe has not solved its fiscal problems and lack of competitiveness. And the world economy is listless, he said. “The pace of the recovery in the advanced economies remains disappointing. There are also signs of lower economic growth in emerging market countries,” Cecchetti said on a conference call.

Exhibit No 1 underlining that weakness will be Thursday’s advance September poll of purchasing managers across the euro zone. It is likely to show the 17-country area mired in recession. Economists polled by Reuters expect the index derived from the survey to edge up to 45.5, from 45.1 in August, but that would still be well below the 50 mark delineating contraction from expansion. “A lot of very difficult steps need to be taken for the sovereign debt crisis to be resolved and, until then, the economy will likely remain sluggish at best,” said Bert Colijn, an economist at The Conference Board research group. 

Reuters