Fiscal spending spree in Europe


    It’s rare that I experience something like what happened last Monday, 21st October, wherein a central bank has cautiously expressed that the country is probably in some form of economic zero-growth situation. It was what the German central bank, Bundesbank, managed to do when the 194-page monthly economic report was released on the said day.

    As it is the first report after the end of a quarter, this issue included a special focus on the economic data during the third quarter.

    The report, of course, does not contain any specific bid for the third-quarter GDP growth, but the good news is that domestic consumption and construction still hold up.
    Exports and manufacturing are generally doing poorly, although there have been some bright spots in the form of a month with more activity than expected.

    But if one should conclude briefly, the third quarter GDP growth looks a lot like the second quarter growth, which was minus 0.1 percent compared to the first quarter of this year.

    The unlucky outlook is already priced in by the financial markets, which is good, as seen from an investor’s perspective. The risk is, however, is that the amount of bad news, even the expected ones, can become so huge, that they collectively weigh too much and panic spreads in the financial markets.

    Though this is not my primary scenario.

    On the contrary, I expect the headlines with recession to provoke fiscal action in a number of countries, not only in Germany and Italy.

    The recession headlines that I expect will force governments to increase public consumption towards the end of the year, though primarily with effect in the first half of next year.

    It should be noted that mid-sized European countries like The Netherlands and Sweden are already planning a more expansionary fiscal policy by 2020, and I expect that, for example, Italy and Germany will also join the club.

    If that wave is going to roll across Europe during the next few months, then I have no doubt that European investors will smile again. Many people have become accustomed to the unknown direction of Britain, but should Prime Minister Boris Johnson maintain his position, my assessment remains that the British government is also prepared to follow the expansionary fiscal path.

    The IMF’s belief in Emerging Markets is, on the other hand, more modest. IMF has, for example, lowered growth expectations for Mexico, Brazil, India and South Africa with 0.4 to 0.6 percentage points since April this year, i.e. in just six months.

    The growth rates, of course, origin from a higher level, where the IMF in April, for example, expected an Indian GDP growth of 7.5 percent in 2020. This expectation has now been lowered to 7.0 percent, which is pretty much within just six months.

    The trade tensions, among other things, drag down the growth in Emerging Markets, which will generate a distinct differentiation among Emerging Market countries.

    There will be countries who have sufficient fiscal room to compensate external negative effects via economic stimulus in the domestic economy, and other countries who will feel the squeeze.

    A solution about the British situation could generate a bit of general optimism, but of course, an agreement between China and the United States unlocks more world trade again. However, my expectation is not that a trade agreement will trigger a sudden strong reverse in the global economy. Again, domestic economic stimulus will be the solution, and I therefore expect China to take initiatives in that direction soon.

    Interestingly, the Emerging Market countries are also some of the countries where I argue that there is a lack of fiscal manoeuvre room to spur domestic growth, so the joy for the next nine months is certainly not evenly distributed across the world and among investors.