Macroeconomics

Fiscal policy

Peru & Mexico elections, (another) Argentine default?

A victory for left-wing populist Pedro Castillo in Peru’s presidential election on Sunday would probably send local financial markets into a tailspin, but we doubt that investors would have much to cheer about even if his rival Keiko Fujimori wins. Mexicans will also head to the polls this weekend for the midterm elections, and a strong showing for President López Obrador’s coalition could embolden him to pursue more interventionist policies in the second half of his term. Finally, Argentina's government missed a $2.4bn payment to Paris Club creditors this week which is another worrying sign that policymakers still do not have a clear plan about how to manage their debts. This bodes ill for renegotiating their huge $45bn IMF loan repayments which kick in soon.

4 June 2021

The three-child policy: too little, too late

State media announced today that China’s family planning policy will be relaxed to allow all families to have three children, up from the current limit of two. This comes shortly after China’s once-a-decade census showed that its population is aging even faster than previously expected. The policy shift will do little to alter the downward trend in births, however. It is largely economic and social trends, rather than family planning policy, that are behind the decline in China’s fertility rate in recent decades, much of which predates the one-child policy. With small family sizes now well ingrained into the fabric of Chinese society, there is little that policymakers can do to turn back the clock. The relaxation and eventual abolishment of the one-child policy around the middle of the last decade only nudged up the fertility rate marginally, with the impact on aggregate births quickly overwhelmed by a sharp decline in the number of women of childbearing age. Raising the cap from two children to three will move the needle even less.

31 May 2021

Fiscal policy to remain loose for longer

Australian Treasurer Josh Frydenberg noted in October that the Government would not pursue budget repair until the unemployment rated was comfortably below 6%. However, the unemployment rate fell much more rapidly ahead of the May Budget than almost anyone had anticipated, reaching around 5.5%. The Treasurer responded by noting that the conditions for reducing the budget shortfall aren’t in place yet and unveiled additional stimulus measures in the Budget. And while the recent sharp decline in spending means that the New Zealand government is on track to shrink the structural deficit in 2020/21, the government unveiled considerable fresh spending in its latest Budget, too. The upshot is that the structural budget balance in both countries will remain deeply in negative territory for years to come.

31 May 2021
Latest Publications

Oil prices and inflation, fiscal support in Taiwan

Fuel price inflation across Emerging Asia will drop back over the coming months as last year’s low base starts to drop out of the annual comparison. With large output gaps set to keep underlying price pressures subdued, headline inflation should fall back too. The upshot is that inflation worries won’t prevent central banks from keeping interest rates low to support activity over the coming months. The virus situation in Taiwan remains precarious, but with exports surging and more fiscal stimulus on the way, economic activity should hold up relatively well.

Public Finances (Apr.)

April’s public finances figures showed that the government’s financial position isn’t as bad as the Office for Budget Responsibility predicted only two months ago, reinforcing our view that the tax hikes and spending cuts that most fear may be avoided.

25 May 2021

Hungary’s policy shift, Turkey’s tight fiscal stance

Guidance from Hungary's central bank this week suggests that it is taking the fight against inflation much more seriously and we now think that a monetary tightening cycle will start over the coming months. This should support the forint, but there are question marks about whether there is appetite at the central bank to move away from deeply negative real interest rates. Meanwhile, Turkey's budget balance has improved significantly in recent months, largely thanks to strong tax collection and spending restraint. But if the central bank struggles to lower interest rates, we suspect that fiscal loosening will be back on the cards.

Wage growth set to accelerate in Australia

April’s labour market figures confirmed that the withdrawal of the JobKeeper wage subsidy wasn’t as big a shock as many had feared. The continued tightening of the labour market should eventually result in faster wage growth, with Western Australia set to lead the way. Meanwhile, the increase in fiscal stimulus in the New Zealand Budget this week supports our view that the economy is set to rebound faster than the RBNZ is anticipating. And the upward revision to the Treasury’s estimate of potential GDP are consistent with our view that the pandemic won’t result in major scarring.

Over the worst?

New virus cases in India remain extremely high, but some solace can be taken from the fact that they have dropped rapidly over the past couple of weeks back to their level in mid-April. The share of tests returning positive has fallen too. Encouragingly, the drop in cases has become more pronounced across major states, including Uttar Pradesh and Karnataka. That all said, it’s too early to sound the all-clear. Even with the fall in cases, there are widespread reports of healthcare remaining under immense pressure, suggesting that restrictions will remain in place for a considerable time yet. Further ahead, the slowdown in the vaccine rollout means that the threat of further outbreaks will remain a dark cloud over the economic outlook.

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