Wednesday , December 11 2019

‘Germany must go for large fiscal expansion’

Bloomberg

Goldman Sachs Group Inc 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 US 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 favourable,” 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 revolutionise 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.”
Goldman expects US economic growth of 2.5% in 2020 off the back of recovering housing, strength in consumer spending and a fading inventory drag, according to its latest report.

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