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Last Updated : May 06, 2019 08:51 AM IST | Source: Moneycontrol.com

'Take a bow, global fiscal bazooka could be arriving soon'

With global trade environment slowing, export-oriented economies need to augment government and household consumption in order to steady the ship.

Hitesh Jain

Hitesh Jain

People often die of their remedy, rather than the ailment! Since 2009, major central banks resorted to ultra-cheap interest rates and massive bond buying programme in order to stimulate the economy. However, loose monetary policies failed to yield the desired results. Theoretically, low interest rates and quantitative easing should lead to higher growth and higher inflation.

On the contrary, the outcome of the measures has been high debt, low or no growth and making matters worse, most of the advanced economies like Eurozone and Japan have failed to attain even benign inflation levels. Had William Philips been alive, he would have either quit his job or renounced his best-known contribution to Economics, the single-equation empirical model named after him, in sheer exasperation.

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Reason: his economic theory (or the Philips curve) of an inverse relationship between unemployment and inflation growth has miserably failed during the past few years.

To wit, unemployment levels in advanced economies have declined, while inflation levels have failed to gain meaningful traction.

Strategic acumen teaches to keep the powder dry, though such is the plight of the central banks that they seem to have already exhausted their monetary arsenal to avert a risk of recession or deflation. With interest rates running well below the historical trends and balance sheets being bloated, central banks are rendered impotent in event of a steep deceleration in the world economy.

The buck now stops with the governments, wherein turning on the fiscal faucet can provide the much-needed impetus to the economic engine. As a case in point, hefty corporate tax cuts in US delivered decent spurt in GDP growth in 2017 and 2018. However, the impact of the stimulus seems to be fading now and no wonder President Trump is running lamp and post for USD 2 trillion infrastructure spending bill.

Although there is still lot of political bickering within US Congress, recent developments indicate that Trump administration and Democrats are seeking a common ground to boost infrastructure spending.

Need of the hour is coordinated fiscal stimulus by the major economies given the broader projections of global economy losing steam. Pertinently, Germany, South Korea and Australia is under pressure from International Monetary Fund to ramp up fiscal support. It is getting imperative for economies with twin surplus (budgetary and trade) to make their fiscal policies more accommodative. A stimulus can channelize excess savings in an economy like Germany to more productive use.

With global trade environment slowing, export-oriented economies need to augment government and household consumption in order to steady the ship. Some major economies have been under-invested in public infrastructure for years, manifested by very low public fixed net capital formation ratios, which makes a compelling case to unleash the stimulus.

The fact that central banks have been pre-dominant owners of sovereign debt makes it much easier for the government for fiscal expansion. In fact, Eurozone economies also have the luxury of borrowing at negative real interest rates, characterised by sub-zero bond yields and abysmally low inflation. After a long period of austere budget, several European economies are already looking forward to loosening the purse strings.

In Asia, Beijing has already stepped on the pedal by allowing provincial governments to borrow more through issuance of bonds to fund infrastructure projects. South Korea has announced a supplementary budget to boost exports and combat air pollution. Indian government has laid lot of emphasis on boosting rural household consumption through various fiscal measures.

(The Author is Vice President at Yes Securities.)

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First Published on May 3, 2019 03:37 pm
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