Why the Economy Is Slowing: 'Things Could Get Much Worse'

By Jeff Cox, CNBC.com Senior Writer

NEW YORK (CNBC) -- The global economy is weak and getting weaker, due in large part to the same policies that helped bring the world back from the brink just a few years ago.

Measures like lowering interest rates and creating money for central banks to conduct trillions in asset purchases are "now seen as a sign of weakness rather than strength," said Andrew Kenningham, senior global economist at Capital Economics, a London-based forecasting firm.

That view is gaining validity as easing moves last week in Europe and China as well as the recent measure from the Federal Reserve have had little effect in financial markets.

In the meantime, optimism already has turned against a supposed deal to recapitalize European banks, the latest in a long line of plans to staunch the euro zone debt crisis initially greeted with enthusiasm then quickly discarded as insufficient.

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Consensus is becoming more widespread that central banks are running out of bullets.

Whereas moves like the Fed's quantitative easing program helped restart the illiquid economy during the financial crisis in 2008, few economists think a third version of QE will have much impact. The program involves buying assets like Treasurys and mortgage bonds in an effort to drive down interest rates and spur investment in riskier assets.

But with interest rates near zero and lending improving only incrementally, a QE3, as it is nicknamed in the markets, has few game-changing targets other than another amping up of stock and commodity prices.

"The global economy is in the midst of a synchronized slowdown, as reinforced by the recent spate of weak economic data," said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch. "Unlike 2008, monetary policy easing appears increasingly ineffective while fiscal policy is headed towards contraction in most countries."

Indeed, it appears policy missteps both monetary, such as those from central banks, and fiscal, entailing taxing and spending policies from governments, are likely the greatest obstacles to growth.

"The upshot of less effective monetary easing combined with widespread fiscal tightening is that growth could continue to weaken, both in the US and globally," Misra said. "This will keep policy rates on hold at historically low levels for longer than would otherwise be the case if the monetary policy tools available were more potent."

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