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The Global Markets Weekly – 8/24/18
Fiscal Boost Still Ahead, Cliff in 2019?
With Jackson Hole in the rearview this week (Powell recap in the U.S. section), below we update fiscal policy estimates relevant to growth estimates this year and next. The Fed Minutes last week showed officials continue to grapple with the balance of upside and downside risks, fiscal policy representing risk to the upside for some, and the downside for others. Can we reconcile those views?
DE estimates fiscal stimulus could add 0.75 percentage points (pp) to GDP growth in the second half of 2018 as added spending from the $300B 2018 Congressional plan kicks in. After a slow start, and under reasonable assumptions of one-third flowing into government purcahses, spending stimulus could jump $120B to a $140B annual rate in Q3 and another $60 to $200B in Q4, which would add 0.8 pp to GDP growth in Q3 and 0.6 pp in Q4. The “change in the change” is what counts ($60B not $200B in Q4) when estimating the impact on GDP growth. These figures are large than what DE thinks consensus is estimating. The overall impact would be 0.4 pp in 2018.
Spending stimulus stabilizes in 2019 at $180B in H1 and $160B in H2. As these amounts are smaller than the $200B registered in 2018Q4, the assumed pattern cuts GDP growth by 0.4 % point in 2019. This creates the mini “fiscal cliff” in late 2019 or early 2020 – the “Wile E. Coyote moment” that former Fed Chair Bernanke mentioned in June – as stimulus drops sharply in 2020Q1 to only $40B, cutting GDP growth by 0.75 pp. Not enough for recession but at least a serious pothole, especially if the Fed is playing catch-up on tightening.
Where estimates can reasonably differ from consensus thinking is in then incorporating economic stimulus from the tax side. According to Joint Committee on Taxation and CBO estimates, net tax revenues fall by twice as much in 2019 ($280B) as in 2018 ($136B). Given the lag between changes in tax policy and capital budgeting, investment spending could well be be stronger in 2019. If so, the added stimulus to investment (and in turn consumer spending) would more than offset the slower pace of federal purchases growth, resulting in a faster overall GDP growth rate in 2019 than 2018—contrary to the CBO forecast of a sizeable drop from 3.1% in 2018, to 2.4% in 2019, which roughly match consensus estimates.
Coming Week’s Key Indicators and Events
|Release||DE / Consensus||Comment|
|U.S.||July PCE Data (Th)
0.4%/ 0.4% m/m
0.4%/ 0.4% m/m
0.1%/ 0.1% m/m
|Consumer spending solid but hardly boomy, housing market showing some softening. Core PCE 2%, headline rate decelerating after July/August data.|
|Euro||Aug CPI (Fr)
|2.2%/ 2.2% y/y
1.1%/ 1.1% y/y
|Top-line inflation accelerating a bit more on energy, but core sideways.|
|Japan||Jul Ind Prod (Fr)
Jul Unemp (Fr)
|0.1%/ 0.2% m/m
2.4% / 2.4%
|Trade concerns a risk but these are relatively low-impact data this week.|
|China||Manuf. PMI (Fr)||0.1 to 51.3 / -0.2||Steady compared to July, sliding recently.|
|Korea||Rate Decision (Fr)||unch at 1.5%||Some risk of a hike on inflation outlook.|
|Canada||Q2 GDP (Th)||3.2% / 3.0% SAAR||Pickup from 1.3% in Q1, BOC slowly lifting policy rate.|