Global GDP has grown an average of 2.5% from 2013 through 2016, a full percentage point below the pace in each of the past two global expansions, according to JPMorgan’s Bruce Kasman.
While the preferred policy instrument to fight low growth has been monetary policy from central banks, a still-stagnant macro backdrop—even amid a swing toward negative interest rate policy (NIRP)—has introduced questions on the limits of these policies.
And this has opened up a push toward more government, or fiscal, spending.
“Given the perceived … constraints facing monetary policy, it has been suggested that fiscal policy take on a greater role in boosting growth,” wrote Kasman.
Need for a fiscal policy boost
While fiscal policy initially played a supporting role in 2009, concerns over public-sector debt in developed markets—and the sovereign credit crisis specifically in the eurozone—led policymakers to reverse policy support. According to JPMorgan’s Joseph Lupton, fiscal tightening has subtracted nearly half a point annualized from global GDP growth for the last five years.
Yet Lupton is joined by other economists in an expectation that fiscal policy will provide a boost to GDP growth this year.
“This would mark the first time in seven years that fiscal policy has bolstered growth,” Lupton said in a recent note.
The magnitude would still remain small though, he explained, at a meager 0.1% point contribution (i.e. no blow-out Keynesian stimulus).
“Given the strong private sector desire for savings and resulting record-low sovereign borrowing costs, the world has gone from needing a lender of last resort to needing a spend[er] of last resort,” he wrote.
More fiscal spending ahead
For 2017, economists project the largest fiscal stimulus to come from Japan—where Prime Minister Shinzo Abe’s administration just announced a 28.1 trillion yen ($130 billion) economic stimulus package, making up 5.6% of GDP.
“This is part of a broader global pattern, with a number of key countries shifting from tight to modestly easy fiscal policy,” wrote Bank of America’s Ethan Harris. “With interest rates close to zero and with diminishing returns to monetary policy, fiscal easing is likely to be an effective alternative.”
Harris added that with all-time low interest rates, fiscal policy will be more effective than normal.
“Clearly, monetary policy is facing diminishing returns as rates turn negative and investors watch the shrinking ammunition dump,” he said. “In the US, it takes pressure off the Fed to do all the heavy lifting… In Europe and Japan, it helps end the gloomy talk about policymakers being out of ammunition. In a zero rate world, there is a lot more room to ease fiscal policy than in normal times.”
The US fiscal focus: Infrastructure
In 2016, the largest source of global fiscal support has been from the US, where the fiscal deal passed late last year is boosting growth by 0.3% this year, according to JPMorgan.
Meanwhile, expectations for further fiscal stimulus in the US are increasing.
Both major presidential candidates have focused on expansionary fiscal policies from current levels (The federal government currently spends about $100 billion on infrastructure.).
Hillary Clinton has proposed a $275 billion infrastructure plan over five years. She has specifically proposed establishing a national infrastructure bank (NIB) and reestablishing the Build America Bond (BAB) program.
Meanwhile, Donald Trump has proposed what he calls an even bigger plan—to spend $500 billion to rebuild US infrastructure, though he hasn’t provided many details.
This push for spending marks a shift for the country. Initial stimulus in 2009 was followed by “passive tightening” as state budgets retreated in the face of declining tax revenues. This eventually led to an “active tightening” of policy during the budget debates of 2011, 2012 and 2013, according to Goldman Sachs’ Jan Hatzius.
“Since the financial crisis, the influence of fiscal policy in the US has come full circle,” he said.
Potential spending deterrent? A divided government
“In the past, divided government has been associated with a tightening in the fiscal stance in the first year of a new administration,” Kostin said. “The obvious reason for this is that the president is likely to have a harder time enacting legislation when one or both branches of Congress are controlled by the other party.”
According to prediction markets, the most likely election outcome is that Clinton will win the White House with a narrow Democratic majority in the Senate and a Republican majority in the House, according to Kostin.
Interestingly, on the other hand, the US deficit doesn’t seem to be a deterrent for more spending.
The current level of federal debt is higher versus the average of the last several decades. Yet in Gallup’s most recent survey on the most important problems to voters, only 4% of respondents cited the budget deficit or federal debt as the most important issues, compared to a peak of 20% in 2013, Kostin cited.
“The simple explanation for this may be that the public is more focused on rates of change than levels,” Kostin said, explaining that the deficit has been less than 3% of GDP over the last two years and is expected to remain at these levels through 2018.
“While we expect both the deficit and the federal debt to rise late in the decade, Congress generally does not react to issues until it is of immediate concern to voters,” Kostin said.
Ultimately, while uncertainties remain, there is clearly a big push for more spending. In the end, what may be necessary is what JPMorgan’s Kasman calls “conscious coupling” between monetary and fiscal policy, especially given the limits of both.