Global Daily – What European fiscal stimulus?

by: Nick Kounis , Bill Diviney

Euro Macro: Commission estimates suggest eurozone fiscal easing will be negligible – The European Commission published its Autumn economic outlook for the European economies today. Its projection for the change in the fiscal stance for the eurozone as a whole for 2020 suggests that easing will be very modest. The structural budget balance (which removes the impact of the cycle, interest payments and one-offs) deteriorates by just 0.2% GDP for the eurozone as a whole in 2020. Looking at the individual member states, this is driven by moderate fiscal easing in Germany (0.4% GDP), the Netherlands (0.5%) Italy and Belgium (both 0.3%). Meanwhile, the fiscal stance is expected to be more or less neutral in Spain, France and Austria. One important caveat on these numbers is that they assume no policy changes and not all member states have finalised policy plans for next year. However, the picture is generally consistent with the indications from governments, which suggest that there is currently no appetite for large scale fiscal stimulus in member states that have the space, while others are constrained by the EU’s fiscal rules. The European Commission called for countries with fiscal space to use it. It noted that it would not only help to cushion the slowdown but that modernising the public capital stock could boost potential growth. Meanwhile, it called for member states with high public debt to enact ‘prudent policies to put their debt credibly on a sustainable downward path’.

EC more relaxed about Italian public finances – The EC expects the government debt ratio in Italy to continue to climb, from 134.8% GDP last year to reach 137.4% by 2021. This assumes the budget deficit rises to 2.3% GDP next year and 2.7% GDP in 2021. It takes into account the measures set out in the draft 2020 budget. Nevertheless, Pierre Moscovici, the EU Commissionner for Economic & Financial Affairs sounded fairly relaxed about the situation, saying that the 2020 Budget would not be rejected and that he would not trigger a disciplinary procedure at this stage. We think economic growth will be weaker than projected by the EC and that the Italian government’s assumptions on increased revenues from measures to tackle tax fraud are optimistic. As such the deterioration in the public finances could be more significant. Having said that, the EC seems to be taking a more dovish stance on the situation, reducing the chances that there will be a clash with the Italian government. (Nick Kounis)

BoE View: Early 2020 rate cut looking more likely – The Bank of England kept monetary policy on hold today, though in a surprise move two members of the MPC dissented in favour of a 25bp cut. The broader MPC were of the view that the current policy stance was appropriate, given that (among other reasons) unit labour costs are “growing at rates above those consistent with meeting the inflation target in the medium term.” However, Michael Saunders and Jonathan Haskel pointed to falling job vacancies and temporary employment as signs that the labour market is turning, and that Brexit uncertainties were likely to persist for longer. The MPC meanwhile added the key line to its statement that “if global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation.” In its quarterly Monetary Policy Report meanwhile, the BoE upgraded its growth forecasts for 2019-2020 (by 0.3pp and 0.1pp respectively), while lowering its forecast for 2021 by 0.4pp. The change for 2021 appears to be based on a shift in conditioning assumptions for Brexit, from a ‘smooth’ transition to new trading arrangements (i.e. a gradual shift over a number of years) to an ‘orderly’ transition, consistent with the current government’s objective to leave the customs union at the end of 2020, with the additional friction in goods trade at the border that this implies. All told, the MPC is demonstrating a clear easing bias, and given the downside risks to growth, looks increasingly minded to ease policy early next year. (Bill Diviney)