Signs of sluggish growth and emerging job market risks overshadowed a gathering of global policymakers at the US Federal Reserve’s annual Jackson Hole conference, highlighting the changing trajectory of monetary policy as US and European central banks consider cutting interest rates. Even as US and European central bankers shift focus from high inflation to softening job markets, the Bank of Japan reaffirmed its commitment to reducing its economy's reliance on decades of monetary support amid growing signs of sustained price growth. The divergence in policy direction, coupled with lingering weakness in China, the world’s second-largest economy, points to turbulent times for the global economy and financial markets.

The policymakers who met at the annual economic symposium had already experienced a preview of what may come when weak US jobs data earlier this month sparked recession fears and triggered a market rout, exacerbated by the BoJ’s surprise rate hike in July. Many analysts agree with the International Monetary Fund’s projection that the global economy will achieve modest growth in the coming years as the US achieves a soft landing, Europe’s growth picks up, and China emerges from the doldrums. However, such optimistic projections are on shaky ground, with doubts emerging over prospects for a US soft landing, euro-zone growth failing to revive, and China suffering from sluggish consumption.

While major central banks are moving towards rate cuts, it remains too early to categorize these moves as a “normalization” of restrictive policy or initial steps to prevent growth from faltering further. This uncertainty could leave global stocks and currencies vulnerable to volatile swings. “We could see other episodes of market volatility as markets are in a little bit of an uncharted territory,” said IMF chief economist Pierre-Olivier Gourinchas. “Japan is on a slightly different cycle. The markets have to figure out what it all means, and markets overreact. So, we will have further volatility,” he added.

In his highly anticipated speech, Fed Chair Jerome Powell endorsed an imminent start to interest rate cuts, stating that further job market cooling would be unwelcome. This marked a significant shift from Powell’s comments during the inflation surge in 2021 and 2022, reinforcing the view that the Fed is pivoting from a policy that pushed its benchmark rate to a quarter-century high and held it there for over a year. New research presented at Jackson Hole showed the US economy may be nearing a tipping point where a continued drop in job openings will lead to faster increases in unemployment. European Central Bank policymakers are leaning towards a September rate cut, partly due to moderating price pressures but also because of a notable weakening of the growth outlook.

The euro zone economy barely grew last quarter as Germany, its largest economy, contracted, manufacturing remains in a deep recession, and exports have faltered, largely due to weak demand from China. “The recent increase in negative growth risks in the euro area has reinforced the case for a rate cut at the next ECB monetary policy meeting in September,” said ECB rate-setter Olli Rehn. Even in Japan, recent inflation data showed a slowdown in demand-driven price growth, which could complicate the BoJ’s decisions on further rate hikes. While consumption rebounded in the second quarter, there is uncertainty about whether wages will rise enough to compensate households for the rising cost of living, analysts say.

Adding to the gloom is China. The world’s most populous country is on the brink of deflation and faces a prolonged property crisis, surging debt, and weak consumer and business sentiment. Weaker-than-expected second-quarter growth forced China’s central bank to make surprise interest rate cuts last month, increasing the likelihood of a downgrade in the IMF’s growth projections for the country. “China is a large player in the global economy. Weaker growth in China has spillovers to the rest of the world,” said IMF’s Gourinchas. Further signs of slowing US and Chinese growth would be detrimental for manufacturers worldwide already struggling with weak demand. Private surveys showed factories struggled in July across the US, Europe, and Asia, raising the risk of a subdued global economic recovery.

For resource-rich emerging economies like Brazil, China’s slowdown could impact metal and food exports, but help alleviate inflationary pressure through cheaper imports. Brazilian central bank Governor Roberto Campos Neto, speaking at Jackson Hole’s closing session, said: “The net effect...depends on how much the deceleration is.”