Central Banks Rule the World

(Bloomberg View) -- The year began with a bit of a bang, economically -- and perhaps even showed that the world's leaders aren't actually in charge.

German unemployment fell to a record low, and purchasing managers' reports from China and the euro region pointed to constraints emerging at factories. So … when do manufacturers start to raise prices? And do they do so enough to alter the inflation picture? Given that much of the buoyancy in markets is underpinned by low interest rates, the answer matters greatly.

This gets us to leadership. It being the first week of January, the world is awash with warnings about what diminished American political leadership, and the West in general, means for the globe. But what if the most effective leaders aren't at the White House, the Elysee Palace or the chancellery in Berlin?

The leaders likely to matter most to markets and the economy are the world's central bankers. And they mostly kept their heads in 2017 while others seemed to be losing theirs. The monetary guardians were helped in no small part by the fact that while growth has been robust, inflation has still been relatively quiescent. 

That's where these purchasing managers and factories come in. The big story in economics this past year is what didn't appear: inflation. It's been mostly MIA despite low unemployment throughout most major economies.

Broadly, there are a couple of schools of thought on what gives. One is that technology and a global market for labor have relentlessly born down on labor costs. Another is that there is so much slack left over from the devastation of 2008-2009 that firms haven't had to -- or lacked the appetite to -- raise prices.

At what point do some of these assumptions start to erode? We're going to find out. If you were surprised by the euro zone's vigor in 2017, you will love that this week's factory report showed new orders and output were both the best in almost two decades. The European Central Bank's much-reduced program of quantitative easing is likely to end completely this year, at which point the question is what comes next.

Central bankers make great scapegoats when things go awry, so it's kind of remarkable that they still wield such power. But they do.

These people are far from perfect, and the mandates of the agencies they lead go only so far. They can't negotiate arms or trade accords, nor can they order troops into battle.

But next time you find yourself wondering why global economic growth and markets look so healthy in the face of geopolitical shifts and rifts, perhaps consider who is really in charge. Economies are living, breathing, complicated things. Individual political leaders can shape them only so much. There is more to Western leadership than the person atop the ballot.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

To contact the author of this story: Daniel Moss at dmoss@bloomberg.net.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net.

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