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Goldman Sachs Group Inc (NYSE:GS). reckons Germany should embrace “a large fiscal expansion” but probably won’t; China should deploy just enough to avert “a sharp slowdown”; and “potential meaningful implications” for budget policy are another reason to watch the U.S. presidential election.
In its ‘Top of Mind’ report, Goldman explores the fiscal front given monetary policy is nearly exhausted in major economies, interest rates are low globally and money-financed deficit spending is gaining attention, interviewing an ex-IMF official, Harvard University professor and its own chief economist.
“Nearly by definition, when interest rates are low -- and especially if the interest rate is lower than the growth rate -- debt dynamics are more favorable,” wrote Olivier Blanchard, former International Monetary Fund chief economist. “So yes, low interest rates increase the room to use fiscal policy.”
After years of unprecedented monetary stimulus, central banks have almost exhausted their tools, and increased pressure on governments to step up fiscal support. The OECD warned this month that the global economy is stuck in a rut that it won’t exit unless governments revolutionize policies and how they invest, rather than just hoping for a cyclical upswing.
Alberto Alesina, a professor of political economy at Harvard, isn’t as sanguine about the use of fiscal policy.
“I think we should keep a longer-term perspective,” he told Goldman. “Yes, interest rates are low, and they may be low for a while, but they won’t be low forever. And when they rise, of course the cost of debt will increase again.”
Earlier this month, the chief economist at the Bank for International Settlements -- often dubbed the central bank of central banks -- said amalgamating monetary and fiscal policy to bolster the economy isn’t the right solution to the world’s slow-growth, low-inflation challenge.
“It helps if both march in the same direction,” but “the boundaries between monetary and fiscal policy must not disappear,” the BIS’ Claudio Borio said. “That is why I do not believe in proposals such as helicopter money or the monetization of fiscal deficits. Otherwise the risk of fiscal dominance, where public finances heavily constrain what central banks can do, would loom large.”
Goldman expects U.S. economic growth of 2.5% in 2020 off the back of recovering housing, strength in consumer spending and a fading inventory drag, according to the report. It sees Japan slowing to 0.4% from 0.9% in 2019, due to the impact of October’s consumption tax increase. The bank forecasts Japan’s government will pass a fiscal stimulus package of about 5 trillion yen ($46 billion) in 2020.
Goldman lowered its expectation for China’s growth by 0.1 percentage point to 5.8% in 2020.
It sees the Euro area picking up to 1.1% next year and predicts the central bank will keep rates on hold. The U.K. is forecast to rebound to 2.4% annualized in the second half of 2020 due to reduced Brexit uncertainty and fiscal stimulus.
Jan Hatzius, Goldman’s chief economist, expects a “fiscal impulse” of 0.3 percentage point of GDP in the Euro area in 2020.
That “is not a lot in an economy that is near stagnation,” he wrote. “So policy makers are moving in the right direction, but at a frustratingly slow pace.”