Fractured electorate hampers efforts to mend 'slow puncture' economy

Wed Mar 16, 2016 1:52am EDT
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By Mike Dolan

LONDON (Reuters) - The combination of a slow-growth world of shrinking policy options and the splintered political voting patterns it's fostered is stifling the global economy at a critical juncture.

Preying on the minds of financial markets for the past year has been a fear that there's no big economic policy bazooka to fire at another cyclical downturn or recession.

With major central banks maxed out at near zero interest rates and inflation rates still below target, spikes in investor alarm like the one seen in January are becoming more frequent as evidence of a China-led world slowdown mounts and oil-led deflationary pressures persist.

Relentless pressure on global banking share prices - still half of what they were before the credit crisis - illustrates both the downsizing of that sector and persistent doubts about its future business model almost a decade after the sub-prime bust.

Implicitly accepting their central banks had little live ammunition left to cope with another recession, G20 finance chiefs last month tried to tilt toward fiscal spending and taxation as a preferred tool policy - at least for countries who could afford it.

But even if government intervention could be funded or economists convinced that 'fiscal multipliers' to spur the real economy were worth it, confidence in a political consensus to execute it is low given increasingly fragmented parliaments with rising numbers of parties and polarized views.

Describing a world economy with a 'slow puncture', HSBC's economic adviser Stephen King this week painted a bleak picture of the coming years trapped in a 'Japan-style deflation' with monetary or fiscal demand stimuli increasingly ineffective.

"Pumping up a deflated world economy ... will require both patience and a large dose of good luck," he wrote, highlighting a need for underlying reforms of corporate and trade structures that, even if successful, may take years to bear fruit.   Continued...

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, in Beijing, China, January 21, 2016. REUTERS/Jason Lee