ID :
425851
Sun, 11/27/2016 - 23:06
Auther :

QNB Group Expects Eurozone to Use Fiscal Policy to Support Growth

Doha, November 27 (QNA) - Qatar National Bank (QNB) Group said in an economic commentary that "with the Euro Area's tailwinds fading, the region is likely to become increasingly reliant on fiscal policy to prop up growth." The commentary pointed that in 2015-16, GDP growth in the Euro Area has averaged 1.8%, well above post-crisis potential growth which is estimated to be around 1.0%. The strongest tailwinds have been falling oil prices, a weaker euro and accommodative monetary policy. However, the winds are now turning and support from these forces is fading, leading to slower expected growth. One positive is that fiscal space has opened up and some large Euro Area economies are expected to increase fiscal stimulus, which should offset some of the slowdown, it said. With the Euro Area's tailwinds fading, the region is likely to become increasingly reliant on fiscal policy to prop up growth. We expect a fiscal stimulus in 2017 for three main reasons. First, fiscal space has opened up as the ratio of government debt to GDP in the Euro Area has fallen from a peak of 94.3% in 2014 to an estimated 91.7% in 2016 and is expected to continue falling. Lower interest rates and stronger growth have helped reduce the debt burden. Second, 2017 is a big election year in the Euro Area with presidential and parliamentary elections in France and Germany and a general election in the Netherlands. Governments usually use election year budgets to raise fiscal stimulus in order improve economic conditions for the electorate and increase chances of re-election. Euro Area governments have already submitted draft budget plans for 2017 to the European Commission. These plans imply a fiscal easing, mainly in Germany and Italy. As a result, we expect growth to come in at around 1.5% in the Euro Area in 2017 as the fading tailwinds are only partly offset by a pivot towards more supportive fiscal policy. It is not just in the Euro Area that fiscal policy is taking on a more prominent role. Trump has promised a major fiscal stimulus through tax cuts and infrastructure spending and Japan announced a USD 45 billion boost to spending in August 2016, which equates to around 1% of GDP. As in Europe, unconventional monetary policy in advanced economies generally has pushed down global interest rates, lowering government borrowing costs and creating room for fiscal stimulus. Fiscal policy could prove far more powerful in boosting aggregate demand than monetary easing in a world with low, even negative, interest rates. An increase in aggregate demand could help the world economy escape the disinflationary pressures and low growth that have been in play since the financial crisis. However, the rising tide of populist measures could increase political uncertainty and lead to rising protectionism. Both of these factors could be negative for growth, offsetting the boost from fiscal stimulus. (QNA)

X