Macroscope | The global economy is in danger if we don’t pull off this pivot

It is all over bar the shouting. The European Central Bank has just announced its final salvo of quantitative easing (QE) and a few more dribs and drabs may come through from the Bank of Japan, but, in essence, that’s your lot. The US Federal Reserve has already closed its money printing operations and the Bank of England has called time as well.

In the main, the global monetary super-stimulus cycle is over and it is time to move onto the next big policy push for world economic recovery. The signs are very clear the global recovery is struggling to get out of the gates and in need of some extra new impetus. President-in-waiting Donald Trump has already shown his cards in favour of a big fiscal push to boost the US economy in the next few years. QE may be coming to an end, but global fiscal reflation must fill the gap.

The global economy is clearly in need of a new policy shove. In the assessment of the Bank of International Settlements, the central banks’ central bank warned recently that “the global economy seems unable to return to sustainable and balanced growth”. Both the IMF and the OECD concur that the major economies need to sanction more fiscal reflation to boost recovery.

QE and the super-stimulus from zero interest rates have pulled off a minor miracle since the dark days of the 2008 global financial crash. Economic catastrophe has been averted, deeper deflation forestalled and the world economy has salvaged some degree of recovery. But it could have been a lot better than what’s transpired. The loss of recovery momentum now evident across the globe – from the industrial majors to the emerging markets – must be reversed.

Global policymakers’ big beef is that much of the global monetary super-stimulus has been blunted by the actions of fiscal tightening pulling the other way. It is very clear to see in the cyclically adjusted budget deficit for the OECD area, which shows a massive correction between 2010 and 2015, from a budget shortfall of 7 per cent of GDP down to around 2.5 per cent presently.

It means, at the same time the central banks were flooding the global markets with unprecedented liquidity, governments of the major industrial nations were removing valuable potential stimulus with dramatic fiscal cuts. The policy conflict has put world recovery into a potential stall with global GDP growth running under par at a lacklustre 3 per cent rate right now.