Was Larry Summers right after all?
Around the world, governments are planning fresh spending to boost growth and support wages, heeding the advice of the Harvard University economist and others who have argued that economies need the jolt as society ages and productivity sags. That’s signaling the ascendancy of energizers like Japanese Prime Minister Shinzo Abe, and the firing of austerity advocates such as former U.K. Chancellor George Osborne.
The shift away from budget rigor and reliance on monetary policy has been subtle and isn’t universal. So while countries like Canada and South Korea are among those rolling out fiscal stimulus, others such as Germany are still holding firm. Borrowing heavily to support growth in the euro area is still out of favor.
Nevertheless, the global mood music now is different from most of the period since the last financial crisis. Instead of the doctrine of belt-tightening and spending cuts, today’s political narrative talks about higher-quality jobs, investment, or the dangers of inequality. In few economies is this more obvious than in America. Where once the government shut down during a spat over spending, now neither candidate in the U.S. presidential election is talking much about the deficit.
“We might be starting to see some chinks of light among the fiscal gloom,” said Steven Barrow, head of G-10 strategy at Standard Bank in London. “The global economy needs a kick up the backside from a demand perspective, and fiscal is probably the way. Monetary policy is just not doing it.”
Asia is leading the drive. Japan is assembling a 28 trillion yen ($273 billion) round of stimulus. While much of that total is made up of loans and longer-term projects with little immediate implication for growth, the package is also set to include fresh spending.
For the current year, Abe’s cabinet on Tuesday approved an extra 4.6 trillion yen earmarked for upgrading port facilities for cruise ships, as well accelerated construction of a high-speed maglev train line.
China, the world’s second-biggest economy, is pumping cheap credit into banks, companies and local governments in an effort to stoke growth. In June alone, the nation’s broadest measure of financing and credit rose by $244 billion. South Korea has unveiled an 11 trillion won ($9.9 billion) supplementary budget to support the jobs market.
According to International Monetary Fund Managing Director Christine Lagarde, there was consensus at the last meeting of the Group of 20 nations in July that more needs to be done to tackle inequality and the backlash against globalization. That means one thing: spending.
Loosening fiscal policy a little in the most advanced economies could pay for itself, according to Oxford Economics, a U.K.-based research house. Their simulations suggest that a boost worth 1 percent of gross domestic product in government investment over two years would raise the level of GDP in individual Group of Seven countries by between 0.6 percent and 1.4 percent by 2017.
And if that’s to be funded by more borrowing rather than tax hikes, there’s never been a more welcoming time in global bond markets, as central bank asset-purchase programs from Japan to the euro area keep yields low.
Take the example of Canada. The G-7 nation’s new Prime Minister Justin Trudeau has put the government back at the center of the nation’s economy with about C$120 billion ($92 billion) in cumulative budget deficits projected over six years and the biggest jump in spending since the 2009 recession.
In the U.S., where Summers has called for a “major increase” in infrastructure investment, both major presidential candidates — Democrat Hillary Clinton and Republican Donald Trump — have come out in favor of more outlays on infrastructure. Trump also has proposed a mammoth tax-cut plan that experts say would cost more than $10 trillion over 10 years, though some of his advisers have suggested he will scale that back. In addition, the billionaire developer has backed increased military spending.
“If his program were implemented in full, it would be quite a large fiscal expansion,” said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York and a former Federal Reserve official.
To be sure, the lift to global growth from the world’s sundry fiscal packages is expected to be modest, and may be short-lived. “It will only raise global growth by about 0.2 percentage point in the year ahead — that is not insignificant but it is also not a game changer,” Hooper said.
Then there’s Europe. While countries like Greece, Italy and other crisis-prone states strive to work down deficits and debt, even those with some fiscal room for maneuver — read Germany — are loath to use it.
The sovereign debt crisis from 2010 has left many states still vulnerable in the event of renewed recession. The euro area is trying to recover from too much spending, not return to it. That doesn’t help when growth is so weak.
“The situation in the euro area has clearly improved, with the aggregate deficit projected to fall under 2 percent this year,” according to Yvan Mamalet, senior euro-area economist at Societe Generale SA in London. “But the problem is that it’s not a fiscal union, and that’s why there’s only limited room for maneuver. The space on paper looks relatively large, but that gives you a false sense of security.”
And while the euro zone’s creaky debt-and-deficit pact attempts to punish budgets that stray too far into the red, there’s no mechanism to oblige member states to spend more when the economy needs a lift.
If there’s one country where the political tide has definitively turned against austerity, it’s the U.K., following the vote there on June 23 to leave the European Union. Policy makers on both sides of the fiscal-monetary divide are likely to throw whatever stimulus measures they can find at the economy to prevent a painful contraction. Chancellor of the Exchequer Philip Hammond — who replaced Osborne when he was fired by new Prime Minister Theresa May — said this month he’s ready to “reset” fiscal policy to respond to Brexit if need be.Yet even in the U.K., the central bank may be in the vanguard with measures to stoke demand. Economists are confident the Bank of England will cut its main interest rate on Thursday, according to a Bloomberg survey. Restarting asset purchases could also be an option.
Globally, monetary policy is still carrying more than its share of the burden for growth, and a few tweaks to fiscal policy here and there aren’t going to make the difference, according to Andrew Bosomworth, head of portfolio management in Germany for Pacific Investment Management Co.
“From an investment perspective I don’t overly rejoice when I see a few more percentage points in fiscal stimulus,” Bosomworth said. “Stimulus has got to be done in a way that’s concurrent with structural policies that boost growth potential. It doesn’t help to go out and build a bridge to nowhere.”