Passing the baton: from monetary to fiscal

4 minute read

12 November 2019

By Gerald Moser, London UK, Chief Market Strategist

Central banks can only go so far in sustaining the global economy. The role of governments, via fiscal measures, also matters. Is 2020 the year when governments at last pick up the baton and open the fiscal spending gates?

In the first quarter of 2019, central banks globally, with the US Federal Reserve being the most prominent, reversed course and loosened policy rather than tightening it. The policy shift helped to improve sentiment and bolstered areas sensitive to rates, such as the housing market.

Central banks reverse course and ease

More supportive fiscal policy

Fiscal spending is likely to increase in 2020, at last. But this additional spending is likely to be gradual. We do not expect a game-changing fiscal event to be seen in 2020, such as the significant tax cuts unveiled by President Donald Trump’s administration in 2017.

Turning to the US, as 2020 is a presidential election year and with Congress opposing President Trump it is unlikely that we will see much spending in the short term. However, depending on the outcome of November’s election and whether the new Congress is aligned with the president-elect, the market may start to discount any fiscal policy promoted by the new president during their campaign.

In Europe, there is a growing consensus for more fiscal action. But growth may need to decelerate further for some austerity-prone countries, such as Germany, to start opening the spending taps.

At the European Union level, there could be concerted actions on environmental issues. Christine Lagarde, the new European Central Bank’s president, is open to including more “green” bonds in the central bank portfolio. With climate change becoming a pressing topic for politicians, there is potential for more spending aimed at speeding up the energy transition towards less carbon emissions.

In the UK, once the Brexit saga concludes and a new government is in place, fiscal policy looks set to be more accommodative than it was in 2019, as politics returns to a semblance of normality.

Green initiatives to the fore

With fiscal policy likely focusing on infrastructure and environmental transition spending rather than outright tax cuts in 2020, investment opportunities are most likely to arise in targeted pockets rather than across the corporate sector. Industries and companies most exposed to efforts to reduce the impact of climate change, accelerate energy transition and improve infrastructure appear set to profit the most from increased spending in those areas.

For the time being, we would focus on green efforts but would carefully monitor development on the fiscal side to adjust our preferences as initiatives unfold through 2020.


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