Economic Weekly: Unwinding

It may be an obvious truth, but it’s worth repeating: the scale of fiscal and monetary stimulus the global economy has received over the past year or so dwarves the levels of support rolled out in any previous crisis. Central banks have sent policy rates to record lows and expanded asset purchases to record highs, before getting creative with new tools.

National governments have run roughshod over balanced budget commitments as they’ve piled on debt to stop ailing businesses from failing, expand social safety nets and inject funding into strained health systems. More than USD$5 trillion has been spent by the US Federal Government vs the circa USD$1.6 trillion earmarked in 2008-9 (and there is more on the way with a big infrastructure package signalled). The European Commission is dishing out €672.5 billion to member states – a decade ago, the body lacked the power to issue common debt. There have been some bold pledges from policymakers too. Just over twelve months ago, French President Emmanuel Macron and the German Economy Minister each pledged that not a single business would face bankruptcy because of the crisis.

There is still considerable uncertainty facing the global economy, but as 2021 wears on, speculation continues to mount about the likely timeframe for unwinding all this support. Inflation metrics around the world continue to tick upwards, and growth forecasts have been revised steadily upward. On the fiscal side of things, the level of support has already dropped off over recent months as programmes have expired. Anxieties about public debt will further come to the fore from here. Less new spending isn’t so much of a worry in the US (where the recovery has bested expectations and the amount spent is already massive), but is more of a concern in Europe, where forecasts have been revised down, the pace of existing stimulus is already proceeding too slowly and there are risks of a wave of corporate bankruptcies as support rolls off.

For monetary policy, most central banks still see more risk in tightening too quickly than too slowly – particularly given we don’t know how sustained the recovery or the uptick in inflation will be. To that end, monetary policymakers have been keen to keep their public comments as dovish as possible to stem the move up in yields over recent months.

Still, there are signs of some shift in the dovish consensus. Last week, the Bank of Canada became the first major central bank to signal a change in tone. The BoC added the usual caveats about uncertainty and ‘pockets of weakness’ in the economy, but the emphasis was all on the stronger-than-expected outlook. Notably, the bank announced it would scale back its asset purchases and brought forward its timetable for hiking rates.

This week it’s all about the US Federal Reserve, with its Federal Open Market Committee (FOMC) meeting at 6am NZT on Thursday morning. Almost everyone (including us) expects the FOMC to stick to a more dovish line than its cousin to the north. Fed Chair Jerome Powell has studiously avoided putting an exact timeframe on tightening policy settings, and the bank was burnt by the ‘taper tantrum’ back in 2013 when it markets reacted negatively to the news the Fed was putting the brakes on its QE programme. Still, in times like these, markets will be closely reading every word for signs of a shift in tone.

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Mark Smith

Senior Economist

Mark joined ASB in 2017, with over 20 years of public and private sector experience working as an economist in New Zealand and the UK.

His resume includes lengthy stints at ANZ and the Reserve Bank of New Zealand, and he has also worked at the Bank of England, HM Treasury and the New Zealand Transport Agency. Mark's areas of specialisation include interest rate strategy, macro-economic analysis and urban economics.

Born and bred in the Waikato, Mark studied at Waikato University where he graduated with a Master of Social Sciences, majoring in Economics.

Mark's key strengths are the ability to use his extensive experience, inquisitive nature, analytical ability, creativity and pragmatism to dig a little deeper and to deliver common sense solutions to tackle complex problems.

When not at work Mark likes to travel, keep fit and spend time with his friends and family.