- Governments are trying to calibrate their policies to support growth as “fiscal cliffs” loom.
- The European Central Bank signaled plans to ease again in December amid potential economic weakness.
- The Federal Reserve is in discussions about adjusting its quantitative easing program.
Some countries move to avoid fiscal cliffsIn Europe, Japan, and those parts of the emerging-market countries where there is fiscal scope, governments are trying to calibrate their fiscal stances to support their economies. This is for the period until a vaccine makes it possible for a more complete recovery and try to minimize the effects of “fiscal cliffs” as earlier stimulus packages expire. In the global race to contain the pandemic, it was announced in November that the initial results of two vaccine trials have been extremely positive.
Countries such as France and the United Kingdom have reintroduced restrictions on mobility and on economic activities amid a second wave of coronavirus infections in Europe. For the most part, these restrictions are somewhat less onerous than those in the spring. Even with limited closures, however, we believe the euro area is heading for a double-dip recession. We forecast the economy will likely shrink in the fourth quarter of 2020. Unless there is a significant policy easing around the turn of the year, in our view there is a likelihood that first-quarter GDP will be zero or negative.
Against this backdrop, policy is already moving to respond; governments are being given free rein to adjust fiscal policy without regard to the rules that, in normal times, constrain public spending. Exactly how much more will be needed will depend on the course of the virus in the coming weeks. Germany, for example, announced a €10 billion package at the end of October for companies hit by renewed restrictions. These efforts are being supported by a European Central Bank (ECB) pledge to keep borrowing costs low and add stimulus.
In the United States, fiscal action was held up by the elections in November. Senate Majority Leader McConnell has indicated a renewed willingness to take up a possible fiscal measure. But he and Democratic House Speaker Nancy Pelosi remain far apart on the cost. Presumptive President-elect Joe Biden has also said he wants to see an aid bill passed by year’s end. Given the election results, we believe any package will be small. It will help, of course, but it won’t materially shift the outlook for the U.S. economy in our opinion.
ECB is ready to inject fresh monetary stimulusCentral banks have remained active. The ECB has clearly signaled it will take easing steps in December to support the eurozone’s economy. The ECB’s key interest rate currently stands at minus 0.5%. Even a leading ECB conservative policymaker has indicated that a rate cut, deeper into negative territory, is under consideration. The Bank of England (BoE) agreed to increase bond purchases in November, while the Reserve Bank of Australia cut its official cash rate to near zero and announced a 100-billion-Australian-dollar quantitative easing (QE) program.
The ECB has clearly signaled it will take easing steps in December to support the eurozone’s economy.In the United States, the election results mean there is likely a bit more weight on the Fed’s shoulders in the coming months. The Fed is in the midst of internal deliberations about adjusting its QE program in light of the risks to the outlook and the changing probabilities of fiscal support. We should expect a lot more tinkering in the next few months, but that’s all – tinkering.
The problem, of course, is that central banks are running out of ammunition. They are not completely out, but there isn’t a whole lot they can do and what they can do is not going to produce big effects in our view. Playing around with amounts of QE and the timing of QE flows, as the Bank of England did with its most recent announcement, sends a signal to the market, but we do not believe it is a particularly powerful one.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.