Central bank fatigue gives way to fiscal stimulus – Danske Bank

Bjørn Tangaa Sillemann, Analyst at Danske Bank, suggests that globally the central banks focus is turning to fiscal stimulus.

Key Quotes

“In the quiet lull of the summer haze we have seen a dramatic turn of events on the global economic scene: first the Brexit shock and now in recent weeks the rebirth of fiscal stimulus as a way to fight the global low growth, low inflation nexus. While the Brexit shock has been covered at length, the re-opening of the fiscal toolbox poses interesting questions for the markets, especially in view of the already high public debt levels seen in many advanced economies.

The newfound interest in using fiscal means should not come as a surprise. Following a period of aggressive monetary easing, there has lately been a growing chorus stressing that central banks alone cannot lift the global economy out of a weak growth scenario arising from concerns that the monetary transmission mechanism has become ineffective in translating monetary expansions into higher real GDP growth.

Leading international organisations such as the IMF and OECD have over the course of the spring become increasingly vocal in calling for pro-growth fiscal expansions and structural reforms as supplements to central bank easing. In its most recent note ahead of the G20 finance ministers and central bank governors meeting in China 23-24 July, the IMF stressed that ‘where monetary policy space is narrowing and there is fiscal space, fiscal policy can help support demand and close output gaps— including through measures that will strengthen growth also in the medium and long term (e.g., Canada, Korea) or, where necessary, facilitate balance sheet repair’.

The OECD has been advocating targeted public investment programmes in response to sluggish growth prospects in most of its member countries. It estimates that high quality public investment can lift growth significantly, which will more than compensate the possible higher borrowing requirement.”