Policymakers in major countries now committing to fiscal expansions – Danske Bank

Bjørn Tangaa Sillemann, Analyst at Danske Bank, notes that over the past couple of weeks we have seen direct fiscal actions (Japan) or intentions to loosen fiscal policies (US) and in the euro area, the loosening has so far been more indirect in allowing a laxer interpretation of the fiscal rule framework.

Key Quotes

Japan: The Prime Minister approved a government stimulus package totalling JPY28trn over several years, which includes new spending of JPY7.5trn (1.4% of GDP). The fiscal package complements another round of monetary expansion approved by the BoJ on 29 July, which was seen, however, as a disappointment by markets which had hoped the central bank would boost the pace of JGB purchases or lower the policy rate.

Euro area: The most prominent change of course was the European Commission recommending cancelling the fines for Spain and Portugal despite their lack of effective action to correct excessive deficits. This sends an important signal of more lenience towards divergence from EU fiscal rules. In addition, the deadline for several member countries for correction of excessive deficits has been extended, including France and the Netherlands. Overall, the fiscal stance in the euro area is set to be growth supportive again in 2016-17 following a period when the euro area was faced with a significant fiscal headwind.

UK: In welcoming the new easing package by the Bank of England, the new Chancellor of the Exchequer, Phillip Hammond, said that he is prepared to take any step to support the economy. So we think it is likely that the easing measures from the BoE will be supported a by more expansionary fiscal policy when Hammond presents the next budget later this year.

US: In their convention speeches, both president candidates Trump and Clinton highlighted the need for big public investment plans to reinvigorate US growth potential. Hence we think that a fiscal expansion in the US in 2017 on the back of the presidential election is likely, especially if US growth continues to be relatively sluggish.

Hence, more aggressive use of fiscal expansions may well become increasingly important over the course of the next 12 months if global growth continues disappoint. The question for investors is what the possible impact such actions will have on bond, equity and FX markets.”