Why Fiscal Policy Is Unlikely to Come to the Market's Rescue Anytime Soon
The growing chorus of investors yearning for fiscal stimulus to keep financial markets afloat next year should brace for disappointment.
The International Monetary Fund yesterday forecast budget balances will tighten modestly in both advanced and emerging markets next year by a sliver: a tenth of a percentage point, respectively.
Economists at Morgan Stanley, meanwhile, estimate that developed countries will ease fiscal policy next year but only to a modest degree at 0.3 percent of GDP — equating to a mild $115 billion increase in spending.
In both the IMF and Morgan Stanley's projections, the upshot for markets is the same: the fiscal stance around the world next year is forecast to remain effectively flat.
"Fiscal easing equivalent to 0.3 percent of GDP is unlikely to materially increase global growth, while the fiscal stance in emerging markets is likely to be broadly neutral next year," Elga Bartsch, lead author of the Morgan Stanley report published on Wednesday, said in a phone interview.
The Morgan Stanley analysts' projections are based on general government budget balances, which provide a top-level overview of outlays implemented across all levels of government. But even when measured on the basis of cyclically-adjusted primary balances — the favored fiscal metric of economists since it strips out interest payments and the effects of the business cycle — the global outlook for government spending is effectively flat next year relative to 2016, according to the IMF, which this week downgraded its outlook for advanced-economy expansion this year.
Buried in its semi-annual fiscal monitor — which sounded the alarm on the world's $152 trillion debt pile — the IMF projects the adjusted fiscal balance for advanced economies in the G-20 will be a deficit of 1.6 percent of GDP this year compared with a 1.5 percent deficit in 2017. A deficit of 1.9 percent and 1.8 percent for emerging market members of the G-20, meanwhile, is forecast for this year and next.
In both cases, "a fiscal contraction of 0.1 percent of GDP is very small, especially, if you compare that to history. So, the IMF essentially is assuming unchanged fiscal policy overall," concludes Morgan Stanley's Bartsch.
Bartsch says headline budget plans reported by governments around the world can overstate the level of government spending. That might explain why economist projections for the global fiscal stance next year are modest despite the fact that increased government spending in Japan and Canada in 2016 has nurtured hopes that government spending in advanced economies is back in vogue.
The Morgan Stanley report sheds further light on this point.
"Governments tend to report the multi-year budget impact of the planned measures instead of the changes compared to the previous fiscal year, which is what matters for economic growth," it said. As a result, the effective fiscal policy impulse is often "much smaller than the government's headline numbers especially when the starting point was an austerity budget," the report concluded.
Unless this week's IMF annual meeting encourages finance minsters around the world to submit more stimulative fiscal plans to their national parliaments in the coming months, Morgan Stanley's projection of $115 billion of fiscal easing next year will pale in comparison to 2009. That year, the G-20 committed to spend roughly $2 trillion — the equivalent of 3 percent of GDP — to firefight the effects of the financial crisis, driven by a fiscal splurge in China.
Meanwhile, in August, a net 48 percent of investors in Bank of America Merrill Lynch's monthly survey of money managers said fiscal policy at the global level was too tight, a record figure since the survey first posed the question back in December 2008, and underscoring the view that governments around the world have a degree of fiscal space.
But judging by economists' modest fiscal projections thus far, market participants could be set for a big disappointment next year — even as U.S. presidential candidates ramp up their election promises to boost infrastructure spending.