Ex­haus­tion of aus­ter­ity meets maxed-out mone­tary pol­icy

Kuwait Times - - BUSINESS -

LON­DON: There won’t be any press con­fer­ences, fire­works or tears to mark its pass­ing, but the lat­est wave of aus­ter­ity world­wide may well have had its day. While that may sound pe­cu­liar to Greeks still strug­gling to meet stiff bud­get tar­gets set by cred­i­tors or even Bri­tons faced with another round of spend­ing cuts by fi­nance min­is­ter Ge­orge Os­borne this week, a turn in post-credit cri­sis govern­ment re­trench­ment looks to be un­der way.

With mone­tary pol­icy vir­tu­ally maxed out in many parts of the world, fis­cal pol­icy is again fore­cast to act as a mar­ginal net stim­u­lant rather than a drag on world growth over the com­ing year. Even in the re­gion that epit­o­mises post-cri­sis govern­ment bud­get cuts, the euro zone, the heavy lift­ing looks to be over. What’s more, the so-called ‘bond vig­i­lantes’ in the debt mar­kets have barely blinked. Their grow­ing am­biva­lence about how aus­ter­ity af­fects debt sus­tain­abil­ity, growth and in­vest­ment amid the anaes­thetic of zero in­ter­est rates, quan­ti­ta­tive eas­ing and a global sav­ings glut means there’s no sign of a tantrum. Fram­ing the shift, Ed­in­burgh-based Stan­dard Life In­vest­ments reck­ons the av­er­age coun­try in the 34-na­tion Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment will struc­turally loosen fis­cal pol­icy next year for the first time since 2010.

That re­lax­ation - where ‘struc­tural’ refers to what the fis­cal bal­ance would be if you strip out the ebb and flow of spend­ing and tax­a­tion as­so­ci­ated with a nor­mal busi­ness cy­cle - is fore­cast to be just 0.2 per­cent­age points of out­put.

But it’s a big mo­ment af­ter the eye-wa­ter­ing tight­en­ing of the three years through 2013 when the av­er­age OECD mem­ber struc­turally squeezed fis­cal pol­icy by 1.3 points per an­num.

“There have been ten­ta­tive signs that this ‘aus­ter­ity con­sen­sus’ is break­ing down,” SLI told clients, point­ing to a new mood across the world on how a lack of in­vest­ment is depressing the al­ready dour world growth out­look. Econ­o­mists at the firm cited changes of di­rec­tion such as the in­fra­struc­ture spend­ing plat­form that helped the new Lib­eral govern­ment in Canada to power last month and Aus­tralia’s new prime min­is­ter promis­ing to lift govern­ment in­vest­ment.

Bud­get caps

Oth­ers point to last month’s US govern­ment deal loos­en­ing strict bud­get caps through 2017, moves that al­low an ad­di­tional $80 bil­lion in spend­ing on mil­i­tary and do­mes­tic pro­grams over two years. Some cite ex­pected new fis­cal stim­uli from Bei­jing as it pur­sues growth tar­gets from China’s new five-year plan.

But the eye-catcher has been the euro zone, where spend­ing pro­jec­tions have been catal­ysed by the con­flict in Syria.

Spend­ing plans by Euro­pean gov­ern­ments are ris­ing as they set­tle the hun­dreds of thou­sands of mi­grants that have streamed in since the sum­mer and France’s out­lay on de­fence has been boosted in re­sponse to the Nov. 13 at­tacks in Paris. At least seven of the 19 euro mem­bers are set to loosen bud­get pol­icy next year even if Euro­pean Com­mis­sion fore­casts show the ag­gre­gate bud­get deficit fall­ing slightly. And sands are clearly shift­ing. Ger­many, Italy, Aus­tria, Fin­land and Bel­gium in­cluded the fi­nan­cial im­pact of the refugee cri­sis in draft bud­gets for 2016 but the full cost may be far higher. French de­fence spend­ing plans have al­ready been blessed by the Com­mis­sion as ex­cep­tional.


“The idea that aus­ter­ity’s not ex­actly the per­fect recipe is gain­ing mo­men­tum. This is a theme across the West,” Pas­cal Blanque, chief in­vest­ment of­fi­cer at Europe’s big­gest as­set man­ager Amundi. “Since mone­tary pol­icy has app­proached its lim­its, the ball is now back in the fis­cal camp.”

Pictet As­set Man­age­ment’s head of multi-as­set strat­egy Per­ci­val Stan­ion de­scribed it as the “ex­haus­tion of aus­ter­ity” with a clear re­al­i­sa­tion in Europe at least that enough was enough - even if large-scale stim­u­lus is still off the ta­ble.

The pub­lic and pri­vate sec­tor re­think of fis­cal pol­icy is driven in part by fears that the world econ­omy could be head­ing for another re­ces­sion with mone­tary pol­icy levers at full tilt, and how cen­tral banks can’t do it all. But Deutsche Bank says its pro­jec­tion of an eas­ing in 2015 of euro fis­cal pol­icy for the first time in five years hinges on QE and what has been such a sharp drop in in­ter­est pay­ments. To­gether these will see pub­lic debt ra­tios peak­ing at 94.4 per­cent of out­put this year and down to 93.7 per­cent next.

“We im­posed on cen­tral banks the need to keep economies grow­ing with­out giv­ing them an ex­plicit man­date to do so or forc­ing gov­ern­ments to sort the rest out,” said Anne Richards, Chief In­vest­ment Of­fi­cer at Aberdeen As­set Man­age­ment. “We need to link fis­cal and mone­tary pol­icy a bit more closely.” Pub­lic pol­icy bod­ies such as the OECD now urge gov­ern­ments to re-ex­am­ine their bud­get spend­ing - echo­ing long-stand­ing con­cerns among many lib­eral and left-lean­ing econ­o­mists that aus­ter­ity for its own sake was self-de­feat­ing over time.

“One rea­son for weak po­ten­tial out­put growth at present is weak in­vest­ment growth. This has im­pli­ca­tions for the com­po­si­tion of fis­cal pack­ages,” the OECD said this month. “Cut­ting pub­lic in­vest­ment... could re­sult in higher debt ra­tios and harm both ac­tual and po­ten­tial out­put growth.”

In­vestors are lis­ten­ing. “With in­ter­est rates close to all-time lows, other gov­ern­ments should join Canada and shift to a more growth-friendly spend­ing mix,” SLI said. “In the process, they might even find that the higher spend­ing pays for it­self.”

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