The world is about to get what it needs to get out of its current economic slump, but not enough of it.
What the world needs in a deflationary crisis like the one we have is more government fiscal stimulus, especially since central banks around the world have loosened policy so much.
In a recent note, HSBC calculated that government budgets are about to expand more in 2016 than they have in any year since 2006.
Of course, there is a problem. According to HSBC Global Chief Economist Janet Henry, the world isn’t going to get enough stimulus to bring it out of the doldrums. What’s more, this stimulus isn’t coming from the places that can really afford it.
Obviously, some countries are not in the best position to stimulate right this very minute, like the commodity producers (aside from Canada and Norway) getting slammed by historically low prices.
“Stimulus really needs to happen in all of the economies with the largest savings investment gaps and in a way that will eventually raise private sector investment and productivity. China and Germany are the obvious ones but current account surpluses are now growing considerably in Japan and other eurozone states too,” Henry wrote.
You’ve got what I need
Aside from China, which has been stimulating its economy in fits and starts since 2014 with diminishing returns, the countries who can afford stimulus — add the US as the third on that list with China and Germany — are just starting to do a little bit. Very little.
Henry writes (emphasis ours):
…There are early signs that public investment has already started to turn, albeit from low levels. In Germany and the US — both countries where the case for a longawaited splurge on infrastructure spending can be easily made — public investment spending is at least now adding to growth… But, given its huge current account surplus, Germany could potentially do a lot more on the infrastructure side which should deliver positive multiplier effects both within Germany but also in its neighbours.
What we really need is the kind of policy coordination we saw after the financial crisis hit in 2009, but that’s not happening. This brings us to an issue brought up by one of Henry’s colleagues a few weeks ago.
In a note called “Unhappy Families: The Case for International Policy Coordination,” HSBC economist Stephen King wrote that the world has the cash it needs to fix its problems, but it won’t be able to because countries don’t trust each other. China, Germany, and especially the US have the tools to get this done thanks to high trade surpluses (Germany), high domestic savings rates (China), and the US’s role as the global reserve currency.
He called these countries the “consumers of last resort,” but the problem is that they won’t coordinate.
Now think about the implications of these policies collectively. If all three ‘consumers of last resort’ were to deliver these concerted actions, they would not only boost their own economies: they would also boost the world economy: as such, they would themselves benefit from faster growth in world trade. In other words, although in all three cases, imports would rise more quickly in the short term, exports would also eventually grow, even if not at the same rate.
Relying on the consumers of last resort who are “in the best structural position to borrow more or save less,” according to King, would help mitigate what Henry considers the greatest dangers of stimulus.
“Looser fiscal policy could exacerbate budget deficits and debt-to-GDP ratios, unless the spending focuses more on supporting supply potential and eventually leads to an improvement in private sector investment and productivity. Inappropriate fiscal stimulus, when combined with overly loose monetary policy, can also worsen macro imbalances and set up problems for the future,” Henry wrote.