Getting Fiscal Stimulus and Central Bank Independence In Synch
Forecasts for global GDP growth are up this year, because fiscal policy has been relaxed. But if the advanced economies achieve more robust growth, it will be because large fiscal stimulus is facilitated by ultra-loose monetary policy.
LONDON – Until early last autumn, the global economy seemed stuck in a deflationary trap. For five years in a row, the International Monetary Fund had downgraded its medium-term growth forecast. In February 2016, The Economist’s front cover depicted central bankers “Out of Ammunition.” In October, the IMF’s World Economic Outlook was entitled “Subdued Demand: Symptoms and Remedies,” though there seemed to be more of the former than the latter. The overhang of private debt left behind by excessive credit creation before 2008 remained unresolved.
Only six months later, prospects seem transformed, with widespread upgrades to growth and inflation forecasts. True, disappointing first-quarter growth in the United States casts doubt on the recovery’s true strength. But at least we seem to have escaped from years of serial disappointment.
Growth forecasts are up because fiscal policy has been relaxed. Advanced economies eased their fiscal stance in 2016 by 0.2% of GDP, on average, ending five years of gradual consolidation. More significantly, China’s fiscal deficit increased from 0.9% of GDP in 2014 to 2.8% in 2015 and 3.6% in 2016. Upgraded US growth forecasts assume a 2018 deficit of 4.5% of GDP, versus the 3.5% that was previously projected. As the IMF notes, this reflects “a reassessment of fiscal policy”, and a rejection of the belief that monetary policy alone can drive recovery.