Fiscal policy is likely to play an increasingly important role in propping up global economic growth, particularly in Canada, according to a report published by New York City-based J.P. Morgan Asset Management (JPAM) on Monday.
Fiscal policy is set to make a greater contribution to global growth in the coming years, the report argues, as many of the developed economies have more capacity to deploy fiscal stimulus, allowing further fiscal easing that isn’t likely to threaten government finances.
“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,” JPAM says in a news release announcing the report.
For example, both Canada and the U.S. “have ample fiscal space”, the report notes. “Canada, and perhaps the U.S., stand at the intersection of fiscal space and willingness to use it. Both countries enjoy favorable gaps between near-term growth rates and borrowing costs, a key determinant of debt sustainability. The Canadian government also carries a relatively light debt burden,” the report says.
“Moreover, Canada already unveiled a stimulus package in early 2016, laying out supporting arguments that may apply to future efforts. Although the U.S. runs a higher public debt ratio, it nonetheless appears to possess significant wiggle room for easing fiscal policy,” the report adds.
Additionally, in the United Kingdom and Japan, fiscal policy will likely be eased “in response to cyclical or structural woes,” the report says.
“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,” says Ben Mandel, global strategist, multi-asset solutions at 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,” Mandel adds. “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.”
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