Governments may boost fiscal stimulus as central banks step back

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Central banks have done bulk of the heavy lifting to boost growth since the global financial crisis, but economists now were expecting fiscal spending will get some life.

Analysts and central bankers alike have talked up the benefits recently of letting the sun shine in on government spending after years of an austerity drumbeat amid an anaemic global recovery from the financial crisis.

"Numerous central bankers, including Mario Draghi, have stressed that monetary policy alone cannot get the world out of its current malaise," noted Andrew Kenningham, senior global economist at Capital Economics, in a note Wednesday. "The U.S. Treasury Secretary, Jacob Lew, even claimed ahead of the G-20 summit in China last weekend that the U.S. had won the argument in favour of 'growth rather than austerity' and that this had prompted a policy shift by many G-20 governments."

That was in part due to the effects of long-running easing efforts by central banks, Kenningham noted.

Many sovereigns have seen their bond yields turn negative, while smaller government budget deficits have reduced debt sustainability concerns, he said.

"With global growth still lacklustre, monetary policy seemingly ineffective and government bond yields unprecedentedly low, the case for fiscal stimulus has become more compelling," Kenningham said. "Partly as a result, we now expect advanced economies overall to benefit from a small fiscal boost in the next couple of years."

But he added that looser fiscal policy wouldn't be a game-changer, although it would make a major global downturn unlikely for the foreseeable future.

Governments across the world stepped up spending immediately after the global financial crisis although concerns over debt sustainability prompted some developed economies to tighten their belts more recently. According to the International Monetary Fund, the fiscal deficit for the world as a whole climbed to 7.2 percent of global economic output in 2009, before halving to 3.6 percent of gross domestic product (GDP) in 2015. However, absolute debt levels stay high, with global public debt pegged at 81.3 percent of GDP in 2015, up from 75.1 of GDP in 2009.

Other economists also expected more fiscal spending would guide the economy after monetary policy steered bond yields lower.

"Central bank purchases of debt have contributed to the worldwide shortage of high-quality safe assets. The resulting supply shortages have made it easier for governments to borrow cheaply," Robert Grossman, head of macro credit research at Fitch, said in a note last month.

"This has the potential to lead more governments to pivot to fiscal stimulus as a tool to boost economic growth," he added.

In a similar vein, Deutsche Bank noted that the pivot toward fiscal policy has come amid an increasing perception that monetary policy may be reaching its limits.

"Despite historically low interest rates and substantial central bank balance sheet expansion, developed market growth and inflation remain stubbornly weak," the bank said in a note Wednesday. "Part of the problem is that monetary policy alone cannot succeed."

Continued monetary easing wouldn't be effective at addressing structural forces, such as demographics or weak productivity, the bank noted. It also can remove incentives for governments to push reforms, it said.

"A handover from monetary policy to other levers to boost growth is in order," Deutsche Bank said, noting that low rates make fiscal easing look attractive and "slack" in the economy means the government wouldn't crowd out the private sector.

But it added that the fiscal packages currently being considered across many developed markets wouldn't make much difference to global economic growth.

And while structural reform was badly needed in some cases, the political landscape meant progress was unlikely, it said.

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1