J.P. Morgan Asset Management Explores Global Fiscal Policy, Finds Fiscal Authorities Tapping on the Accelerator

NEW YORK, Sept. 12, 2016

"Considerable dissatisfaction among policymakers and voters surrounds economic performance in developed and emerging economies alike. Despite very supportive monetary policy stances, growth is running at a weak pace by historical standards," said Michael Hood, Global Strategist, Multi-Asset Solutions, J.P. Morgan Asset Management. "To a large extent, this sluggishness reflects a structural slowdown in potential growth, driven by demographic changes. As central banks continue to explore ways of boosting demand and acting in increasingly unconventional fashions, the calls for greater use of fiscal stimulus have grown louder."

Key findings include:

• The contribution of fiscal policy to global growth is poised to rise in the coming years. While large-scale fiscal easing seems unlikely outside of an economic downturn, we believe that the recent trend toward moderately easier fiscal policy has room to run.
• This trend is generally positive for the global economic outlook. Fiscal thrust would add balance to a global policy mix that has been heavily reliant on central banks, and could even have a positive influence on longer-term growth. In economies with spare capacity, easier fiscal policy could buttress cyclical growth prospects and, by extension, equity markets.
• The capacity of DM economies to deploy fiscal stimulus has increased. Interest rates have languished below GDP growth rates in many economies, creating "fiscal space" for deficits to grow without blowing up ratios of public debt to GDP.
• Rules of thumb based on historical norms may understate government capacity to sustain debt burdens. At the vanguard, Canada and the U.S. have ample fiscal space. In the U.S., the sustainable level of public debt may well be rising. In the UK and Japan, fiscal policy will likely be eased—if begrudgingly—in response to cyclical or structural woes. In Europe and Australia, we expect policy inertia will keep the fiscal stance more or less stable.
• We do not expect fiscal stimulus to produce large, destabilizing increases in government bond yields in the cases under consideration. And if fiscal stimulus produces any discernible response of potential growth, it could be a game changer, portending much more aggressive use of fiscal policy outside of recessions.

"The policy outlook places incrementally more emphasis on fixing structural growth and less on sustainability, in line with our more sanguine view of the fiscal capacity of developed market economies," said Ben Mandel, Global Strategist, Multi-Asset Solutions, J.P. Morgan Asset Management. "In addition to the record-low current levels of bond yields— which make debt easier to carry — we argue that sustainable public debt levels are probably higher than in the past.  All in all, we see fiscal policy as an upside risk to our global economic views and a support to modest tilts toward riskier assets in multi-asset portfolios."

Please view the full J.P. Morgan Asset Management Investment Insights paper "Fiscal therapy: Prospects for a policy-driven boost to growth" by Global Strategists Michael Hood and Benjamin Mandel, here.

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