Bragging Rights Won by U.S. on Fiscal Squeeze: Cutting Research

The U.S. has found the secret of delivering tighter fiscal policy and stronger economic growth, exposing Europe’s failure to do the same even as continental policy makers were more vocal in promoting austerity.

In a report titled “Fiscal Brag,” Dario Perkins of Lombard Street Research estimated the U.S. has squeezed its structural budget by about 4 percent of gross domestic product since 2010, more than major members of the euro area have. At the same time, U.S. GDP growth has averaged 2.2 percent as crisis-stricken euro countries stagnated or shrank.

That the U.S. continued to grow suggests to London-based Perkins that its fiscal multiplier -- which measures the economic impact of a change in government spending or taxes -- is lower than in Europe.

The U.S. budget narrowing started later than the euro area, which began in 2010, and the Federal Reserve was more aggressive than the European Central Bank in easing monetary policy, he said. Europe also may have suffered more because of its reliance on trade with neighbors, all of which were tightening budgets, said Perkins, a former U.K. Treasury economist.

A softening of the so-called fiscal drag worldwide is “likely to play an important role in supporting a pick-up in global growth” next year, Goldman Sachs Group Inc. economist Jose Ursua wrote in a Nov. 13 report. He calculated the almost 1.5 percentage point estimated squeeze in the budgets of the Group of Seven economies this year to be the most since the financial crisis of 2008.

In the U.S., for example, he predicted a 1.6 percentage point decline in the fiscal pullback would contribute to 2.8 percent growth next year.

The U.S. success in retrenching is backed up by a Nov. 14 report by David Woo, the New York-based global head of interest rate and currency strategy at Bank of America Corp. He ranked the U.S. first among major economies for tackling its fiscal deficit, outpacing the euro zone in fourth place. New Zealand and the U.K. were second and third.

* * *

Price pressures are deteriorating across the euro area in a sign of mounting disinflation, according to a breakdown of price data by Marchel Alexandrovich of Jefferies International Ltd.

London-based Alexandrovich studied the 73 components used by the European Commission’s statistics division to estimate the consumer price index, excluding such volatile items as food. Almost 70 percent were growing less than 1.5 percent in recent months on a weighted basis. That’s almost as many as in the aftermath of the euro area’s recession of 2009.

“In other words, this is not just a case of there being a few items where inflation has suddenly collapsed, but rather a more wide-spread shift to a lower inflation environment,” said Alexandrovich.

About 21 percent of the total CPI basket is in deflation, with a sub-zero inflation rate. While higher than in three years, that’s lower than the level of about 40 percent in early 2010, he said.

* * *

The recent global recession was not bad enough to merit declaring it a depression, according to a study published by Germany’s Bundesbank.

The discussion paper published this week identified three depressions and one boom in the U.S. between 1919 and 2009. The authors based the decision on characteristics such as duration and amplitude of the economy’s performance and how much the shifts are outliers from the average. While business cycles in the U.S. are traditionally dated by the National Bureau of Economic Research, there is no official definition of either a global recession or depression.

The slump between December 2007 and June 2009 “does not qualify as extraordinary in comparison with previous economic downturns,” said authors Norbert Metiu of the Bundesbank, with Bertrand Candelon and Stefan Straetmans of Maastricht University. “Even though it is the most severe postwar recession, it is dwarfed along every dimension by the prewar depressions.”

When trying to divine whether a depression is pending, stock market returns, real output growth and inflation “convey statistically relevant information,” the study said.

* * *

While the world’s major central banks have struggled to restore their economies to health following the global financial crisis, that doesn’t mean they need a major overhaul of the policies they followed prior the turmoil.

That’s one of the conclusions in a working paper published by Bank of Canada economist Ianthi Vayid this week. In particular, central banks that target inflation with their policies should carry on in the absence of workable alternatives.

Many central banks have had to deal with nominal interest rates at the zero lower bound, which opened a debate on the merits of alternative policies such as price-level targeting, where authorities aim for a particular level of a price index as opposed to its rate of change, and nominal GDP-level targeting, where authorities seek to engineer a particular level of output.

“It is not at all clear that the existing monetary policy framework needs to be changed fundamentally,” Vayid wrote in the paper. “Maintaining price stability over the medium term should remain the primary focus.”

The “main lesson” of the crisis is that “maintaining financial stability is an equally critical policy responsibility,” she wrote. Central banks must continue “to improve the ability of central banks to address monetary and financial stability considerations, and to communicate effectively with the public and the markets.”

* * *

Only a change in housing taxation has a “discernible” impact on rising property prices among nine policies studied in a report for the Bank for International Settlements.

Using data from about 60 countries over three decades, economists Kenneth N. Kuttner of Williams College and Ilhyock Shim of the BIS studied tools policy makers can use, other than interest rates, for stabilizing house prices and credit. These include limiting the size of loans borrowers can tap.

An incremental tightening of housing-related taxes is associated with a two- to three-percentage point reduction in price growth, the economists found.

* * *

Investors and policy makers should focus more on “natural capital,” or the amount of resources an economy has, according to HSBC Holdings Plc’s climate-change strategy team.

While air, land and water often underpin the ability of economies, companies and households to operate, they are often unaccounted for in forecasting, Zoe Knight, Nick Robins and Wai-Shin Chan said in a Nov. 19 report.

“We think that natural capital factors are becoming a bigger driver of overall economic productivity and that, increasingly, policy makers will act to manage change,” they said. “Ultimately, this will impact the potential return profile of investors.”

Looking across the Group of 20 economies, HSBC identified Saudi Arabia and South Africa as already water-scarce, while supplies in India, South Korea and Germany are stressed. Australia, Canada, South Korea, Saudi Arabia and the U.S. also have the highest per-capita carbon emissions.

Governments will need to do more to maintain natural capital stocks, the report said. The 15 major European countries, for example, spend just 0.9 percent of GDP on the environment, compared with 7.5 percent on health and 1.5 percent on defense, it said.

“Well-designed policy measures to sustain natural capital are positive for long-run economic prospects, helping to drive resource productivity,” HSBC said.

* * *

About half of the recent surge in the Nikkei 225 Stock Average can be ascribed to the decline of the yen.

So estimates a blog from the Federal Reserve Bank of New York. The Nikkei has risen 48 percent this year, while the yen has dropped 14 percent against the dollar as the Bank of Japan introduced more monetary stimulus to tackle a deflationary economy.

A depreciating yen should help boost stocks because it makes Japanese products cheaper to trade and so helps the international profits of exporters, said New York Fed analyst Andrew Howland and Benjamin Mandel, now an economist at Citigroup Inc.

The study found a 1 percent drop in the yen tends to increase the Nikkei between 1.4 and 1.9 percent.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.