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20 September 2019


Yesterday, the Organization for Economic Co-operation and Development cut its outlook for global GDP growth for 2019 from 3.2% to 2.9%, the weakest in a decade.

For the US, it cut its outlook to 2.4%, down from 2.8%. The new forecast comes in the midst of a global rate cutting exercise from central banks over the past weeks (except for maverick Norway). But, as Mario Draghi pointed out, the next big thing to boost growth should come from the fiscal side. So where are we regarding fiscal stimulus in Europe?

You would expect to hear the southern countries, bogged down by budgetary problems, declaring that they actively support such measures and more frugal northern countries saying that we need to refrain from them. But here’s a surprise for you, the Dutch have bitten the bullet and announced a mildly more expansionary fiscal stance. They have announced plans containing measures for 2020 which are in line with a fiscal expansion of around 0.7% of GDP. Most of this is due to the reduction in labour income taxation, aimed at boosting the purchasing power of households. Moreover, the prime minister is pushing employers to increase employees’ salaries by
around 4%, according to the press.

Today, attention will turn to Germany as plans should be unveiled regarding the well-known Energie-Wende which aims at reducing carbon emissions. Now, such ambitions do not come without a price tag, or at zero cost. So what is it worth for the German government? In other words, will we see an expansionary budget freeing up the whispered EUR 40 to 50 billion? The German economy could do with some deficit spending. Germany has the room and need for it. But the famous ‘Schwarze Null’ will need to be abandoned. So who in the government will dare to ditch the concept?

If fiscal support indeed takes over from monetary support in Europe, this would be a true game-changer. Growth could rebound, so would bond yields and the recent run-up in value stocks would have legs. But perhaps we should not hold our breath. Germany is key and we’ll find out soon enough what will be done. Another surprise or another big disappointment?