Fiscal Policy Dials Up as Era of Easy Money Draws to a Close
Governments are stepping up just as central banks crawl away from crisis-era settings.
(Bloomberg) -- Governments are stepping up just as central banks crawl away from crisis-era settings.
While the shift is modest, it suggests more support for a global expansion buffered by trade tensions and bouts of market turbulence. Morgan Stanley estimates that the fiscal deficits in four of the world’s biggest economies -- the U.S., euro area, Japan and the U.K. -- will rise to 2.8 percent of gross domestic product in 2018 and 3 percent in 2019, from 2.5 percent last year.
President Donald Trump’s tax overhaul, the biggest since the Reagan era, helped push U.S. growth to 4.1 percent in the second quarter, the fastest since 2014. Trade foe China is using tax cuts and infrastructure spending to underpin demand. The European Central Bank estimates the euro region’s fiscal stance will be “mildly expansionary" this year.
"We are at the early stages of this shift," said Michael Shaoul, chief executive officer of Marketfield Asset Management. "Over the short to medium term, my guess is that greater fiscal stimulus will serve to accelerate parts of the global economy, intensifying the reflationary trends in place and absorbing what is left of global slack."
What Our Economists Say“Fiscal tightening in the advanced economies of the world has become a thing of the past. The fiscal impulse indicates those countries, led by the U.S., are now getting a small boost from fresh government spending.” -- David Powell, Bloomberg Economics
In Japan, the government of Prime Minister Shinzo Abe passed a record 97.7 trillion yen ($880 billion) budget for the fiscal year that started on April 1. It has indicated it will consider using remaining funds from the last fiscal year for a possible extra budget after flooding and landslides in western Japan caused widespread damage and killed more than 200 people.
South Korean President Moon Jae-in has opened the spigot with a 3.8 trillion won ($3.4 billion) extra budget planned for this year, aimed a creating jobs for young people and helping workers laid off due to corporate restructuring.
Australia’s government has legislated income-tax cuts worth about A$144 billion ($106 billion) over 10 years to stimulate an economy with stagnant real wage growth.
"Fiscal policy was largely neutral or even restrictive over the past five years in the advanced economies and now it is becoming expansionary," said Joachim Fels, global economic adviser at Pacific Investment Management Co. in Newport Beach, California.
Still, the IMF said in a recent analysis that room to increase spending -- so called fiscal space -- is "not extensive" in the world’s two biggest economies, the U.S. and China, and it’s severely constrained in economies including Italy and Brazil.
Brazil imposed constitutional limits to public spending in order to rein in a budget deficit of nearly 10 percent of GDP, although the government has struggled to tighten the purse strings before October’s presidential election. Argentina is also striving to meet tighter fiscal targets agreed with the IMF in exchange for a $50 billion credit line.
In Europe, the fiscal stance is anything but uniform. Germany’s Finance Minister Olaf Scholz has pledged to stick to the balanced-budget commitments of his predecessor, Wolfgang Schaeuble. French President Emmanuel Macron has vowed to end years of budget deficits even as he pushes for more spending at the European level. And bold spending plans notwithstanding, Italy’s populist government will be limited by the country’s large debt pile.
At the same time, Spain’s new government is calling time on years of austerity and plans to increase spending by 4.4 percent as part of a push to boost welfare. ECB President Mario Draghi used his regular press conference on Thursday to reiterate his call for euro-area nations to pursue a “more growth-friendly composition of public finances.”
The European Fiscal Board, an expert group that advises the European Commission, estimates that the fiscal stance in the euro area will be “moderately expansionary,” with a a fiscal expansion of 0.4 percent of gross domestic product in 2018 and 2019.
“We are looking at a modest fiscal loosening at best and no real monetary tightening,” said Jennifer McKeown, chief European economist at Capital Economics in London.
The swing to fiscal support at a time of relatively synchronized economic growth begs the question: will there be scope for government help when economies really need it?
"The great policy rotation from monetary stimulus that did all the heavy lifting since around 2011 is actually happening," said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney. "The unusual thing about the return to fiscal stimulus is that it’s occurring at a time when global growth is actually strong and we don’t really need it."
--With assistance from Michael Heath, Walter Brandimarte and Andrew Mayeda.
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