Fiscal Spending and Global Growth

Japan surprised the world earlier this week by revealing that their GDP expanded at a 2.1 per cent annualized pace in Q1/19. For an economy in the mire of an aging population and a birthrate that’s falling faster than HBO subscribers after the Game of Thrones finale, that’s attention-getting. The number came in well ahead of the 1.6 per cent annualized rate registered in Q4/18. While the result was exemplary, what was most notable was strength of Japan’s growth despite weakness in manifold segments of the world’s third-largest economy. Capital expenditure, for example, declined 1.2 per cent on an annualized basis over the first three months of the year while consumption, comprising 60 per cent of Japan’s GDP, slipped 0.3 per cent for the period.

It was an escalation in government spending, which advanced at a whopping 6.2 per cent annualized rate, that bolstered Japan’s growth last quarter. The government spent the equivalent of $27 billion on infrastructure, according to a recent report in The Wall Street Journal. Parliament is contemplating raising the consumption tax, however, later this year.

Academics argue that fiscal deficits serve as an economic shock absorber as government spending fills gaps in private consumption during recessions. At the height of the global financial crisis, US and Japanese budget deficits hit 10 per cent of GDP. Conversely, in good times, economic theory suggests governments run budget surpluses to offset deficits and pay down debt. That isn’t happening.

Bowing to nationalist pressure, fiscal spending is on the rise worldwide. France, for example, spent over $11 billion on concessions made to anti-government protesters, breaching the European Union’s deficit ceiling. America, having fallen in love with quantitative easing, now contemplates Modern Monetary Theory, a strategy that would fuel government spending by printing money. The stakes are high and the risk of political parsimony is daunting: unpopular austerity policies cost the UK’s Conservative Party its parliamentary majority in 2017. This shift toward looser fiscal purse strings represents one of the greatest economic policy transformations in a generation. Five of the world’s six largest economies are running government budget deficits between 2.5 and 7 per cent of GDP despite enjoying economic expansions.

Expect fiscal spending to escalate and government deficits to mushroom globally. Government policymakers, hell-bent on keeping their jobs, are likely to pander to the backlash against the elites.  With more than $12 trillion of bonds trading at yields below zero, monetary policy is impotent. That means that fiscal stimulus has taken center stage. In an environment of fiscal profligacy, investment risk taking will continue to be rewarded.