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Global economy’s storm clouds prompt louder pleas for fiscal aid

Central banks cannot continue carrying the burden of aiding the fiscus alone.

Global finance ministers are facing intensified nagging to loosen purse strings and aid the world economy at a time when central banks can’t keep carrying the burden alone.

Group of Seven officials meeting near Paris confronted an outlook of slowing growth that has already prompted monetary authorities to shift stance and prepare for stimulus. But with limited ammunition for them to deploy and persistent trade tensions threatening to weaken momentum further, finance ministers were told they need to step up to the plate too.

“Monetary policy is one thing, but we need also to reflect about fiscal policy,” Pierre Moscovici, the European Union’s economic and monetary affairs commissioner, told Bloomberg Television. “It’s high time that we build the right policy mix because what we see today is a slowdown in the economy everywhere.”

While finance chiefs can bring such a message home with them when their meeting concludes on Thursday, their deliberations didn’t suggest an urgency to act. That’s more in the hands of central banks for now, with both the Federal Reserve and the European Central Bank poised to deliver some sort of stimulus as soon as this month.

“Central bankers are heroes,” said Angel Gurria, secretary general of the Organisation for Economic Cooperation and Development. “You now need fiscal policy to come in. You now need countries that have the fiscal space to come in and stimulate their economies, invest some more.”

That’s been a frequent lament from the Paris-based club of rich countries, and one often directed to Germany in particular. Europe’s biggest economy, which faces an industrial-led slowdown as Donald Trump’s US administration upends the existing world order in trade, has long been reluctant to borrow and spend more. Yet with its debt currently commanding negative yields, the country might never before have been able to do it so cheaply.

“There is room in many economies and they should use it,” Gurria insisted. “It doesn’t mean they’re going to lose control of their economies or their deficits or their debt.”

Rate cuts

Monetary authorities remain in the vanguard and some have already started to act. On Thursday, the Bank of Korea and Bank Indonesia both cut interest rates, and Ukraine and South Africa may follow within hours.

Read: Prospect of SA rate cut stirs hope for retail stocks

Of the central banks attending the G-7, the first with the chance to act will be the ECB, which convenes next week. Investors are speculating it may resume and broaden bond purchases after President Mario Draghi hinted at possible easing measures last month. Markets are now more than fully priced for a 10 basis-point rate cut for September.

For the Fed, which meets on July 30-31, investors fully expect a quarter-point cut, according to pricing in interest-rate futures. The debate in markets has moved on to whether officials could ease by a more aggressive, half-percentage point.

While that may deliver an opening salvo in a global push to keep the world economy on track, it may not be enough. That prospect leaves central bankers fretting that they shouldn’t have to bear the burden of stimulating economic growth

“They can’t perform miracles,” Bank of France Governor Francois Villeroy de Galhau said on BFM Business radio. “So alongside that, fiscal policy and reforms are needed.”

Moscovici warned that officials can’t be complacent about the challenges the world economy faces.

“We see a slowdown for this year with a modest recovery — but we also see that there is an accumulation of risks,” he said. “We need to be thinking about what happens if there is more than a slowdown.”

© 2019 Bloomberg L.P.

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