2015 key challenge ‘to create inflation’
Key economies such as the US have failed to generate levels of inflation necessary to put the global economy fully back on track, and this makes 2015 a critical year when fiscal authorities must also do their part to stimulate higher levels of inflation, argues Nicolas Doisy, Strategy and Economic Research, Paris at Amundi.
“With monetary policy (even nonconventional) struggling at accelerating the recovery, the issue for 2015 will be for active fi scal policies to raise inflation in order to reduce real interest rates globally,” Doisy writes in the French manager’s latest Cross Asset monthly investment note.
“While America and China have renounced going for another round of QE (for various reasons specifi c to each), this should be the golden opportunity for the ECB to step in with large liquidity injections to pursue the implicit coordination at work with the Fed since June 2010. Accordingly, the most salient risk for 2015 will be lack of shifting the eurozone’s fiscal policy towards pro-active stimulation.”
Danger looms large from the eurozone and China, both of which could start to export deflation globally via the US, where wages have remained “stubbornly” stuck, which Doisy links to the issue of excess capacity in economies.
“Indeed, excess capacity is weighing on wage growth to expand the profit share (the compensation of capital): it thus keeps a lid on the utilisation rate of the working-age population and demand.”
The policy challenge therefore will be to find ways to make private debt in particular more affordable, by raising inflation and lowering real interest rates. The role of governments in stimulating economies via fiscal policy will therefore be in the spotlight because of the risk that monetary policy will have less effect – China has already done its QE measures, while although the ECB is holding off, there are no guarantees that this will improve the effectiveness of any eventual full scale QE measures. Central banks also face moral hazard in coordinating their responses, Doisy suggests.
In conclusion, next year could see a battle of ideas between those such as Germany, which could continue to refuse any shift towards fiscally based stimulation, and those such as France, which face the threat of deflation. “But the deflation threat hanging over systemic countries like France is the best guarantee for action.”
Meanwhile, politicians in both the US and China are likely to increasingly see a need to encourage stimulation of their own economies.