Markets in 2009, the Role of Fiscal Policy
MPSIF: Educated Investing
Carlos Amaya, Sobby Arora, Oliver Brassard and John Brouillard
Issue date: 3/10/09 Section: Voices
Fourth, external demand continues to dampen as the world economy continues to deteriorate. Recently, the IMF downgraded its global growth projection for 2009 to just 0.5%, the lowest since World War II. The Euro zone and the UK fell into recession in the middle of 2008 and are not expected to post a positive growth until early 2010. Policy measures in this region have not been as aggressive as in the US. Despite recent fiscal stimulus measures equivalent to 2% of GDP, Japan's economic output tumbled -12.7% annualized in Q4 2008, the sharpest decline since 1974, and Q1 2009 growth is expected to post another double digit decline. Japan's industrial sector is facing steep declines, rising unemployment is keeping consumer spending soft and the surge in the yen continues to hamper export growth. As for emerging economies, the decoupling theory proved to be an illusion as all of the economies are experiencing an important slowdown. China, India and Brazil have responded with countercyclical policies while Russia is in the middle of a currency crisis. Linkages to developed economies and the sharp decline in commodity prices will continue to limit growth in these economies.
With such a gloomy outlook in the private sector, the role of government intervention is definitive in shaping the current environment. Regarding monetary policy, the Federal Reserve has been very active in undertaking bold actions that support the real economy and financial markets. Interest rate reductions in the US have been accompanied by similar reductions in the other developed economies. Reduction in interest rates and the Fed's quantitative easing policy have provided much needed liquidity to the markets and have translated into lower Treasury rates. Despite monetary policy being an important backstop during this crisis, we believe monetary policy power is limited as long as the credit channel continues to be broken and as long as solvency issues (of households and financial institutions) persist in the private sector.
With such a gloomy outlook in the private sector, the role of government intervention is definitive in shaping the current environment. Regarding monetary policy, the Federal Reserve has been very active in undertaking bold actions that support the real economy and financial markets. Interest rate reductions in the US have been accompanied by similar reductions in the other developed economies. Reduction in interest rates and the Fed's quantitative easing policy have provided much needed liquidity to the markets and have translated into lower Treasury rates. Despite monetary policy being an important backstop during this crisis, we believe monetary policy power is limited as long as the credit channel continues to be broken and as long as solvency issues (of households and financial institutions) persist in the private sector.
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