BENGALURU Economic growth and inflation across the globe will lose further momentum this year despite years of ultra-easy monetary policy, according to several hundred economists polled by Reuters, many of whom said it is now time for fiscal expansion.
That comes after several trillion dollars worth of stimulus from major central banks over the last half decade, which has, for the most part, boosted financial assets but done little to ensure growth becomes self-sustaining and generates inflation.
Nearly 86 percent of economists polled around the globe by Reuters in the past week said yes when asked if major developed economies should now use fiscal policy to add stimulus, like Canada, rather than even more aggressive monetary easing.
"Central banks remain under pressure to do more to meet their inflation targets but it may be time for governments to step up to the plate to support long-term growth too," Janet Henry, chief economist at HSBC, wrote in a note.
"Some could clearly take advantage of the current very low bond yields by increasing borrowing and spending without fear of crowding-out the private sector."
Canada last month became the first major developed economy in recent years to announce a fiscal stimulus package, a tacit acknowledgement that monetary policy has nearly run its course and can't be expected to boost growth and inflation on its own.
Central bankers, the International Monetary Fund and the World Bank will also likely discuss the need to stimulate global demand through increased government spending when they meet in Washington, D.C. this week.
An overwhelming majority who answered a follow up question, said infrastructure spending would be the most effective. Some picked minimum wage increases since it helps increase consumption on a permanent basis.
Several others listed other forms of stimulus such as permanent income tax cuts, spending on education and economic reforms as effective policy options.
But, in the absence of such policies, global growth will likely stay muted at around 3 percent this year, followed by 3.3 percent next -- about two percentage points less than the pace it was expanding at before the financial crisis struck 8 years ago.
That consensus is slightly lower than the IMF's latest projection of 3.2 percent global growth in 2016, the fourth time it has cut growth forecasts this year.
And while the U.S. economy is expected to remain stable, giving the Federal Reserve room to raise rates by June, growth across much of the rest of the world, especially China and the euro zone, will be lacklustre at best.
"There are still plenty of pitfalls ahead – China's macroeconomic and financial difficulties, the Brexit vote and U.S. Presidential Elections all have the potential to upset risk sentiment – with little left in central bank arsenals to provide any more offsetting support," said Mark Cliffe, head of research at ING.
PLENTY OF RISKS
For much of the past year, China has been at the centre of the global financial market turmoil, sometimes offering reasons to cheer but most of the time fuelling concerns about its economy and global growth losing momentum.
The world's second largest economy is forecast to expand by 6.5 percent this year, which would be the weakest official growth rate since 1990, maintaining pressure on Beijing for more policy support.
"As the economy continues to work through its significant overcapacity issues, job losses in sectors ranging from coal mining to steel production could be significant," economists at BMI Research wrote in a note.
Apart from China, a now routine first quarter slowdown in the U.S. economy is also likely to temper optimism slightly, despite its labour market being in robust shape and inflation shows some signs of picking up pace.
That should allow the Fed to raise rates twice this year with the first hike probably coming in June, economists predict, although even those odds appear to be dwindling.
In the short-run though, a lot depends on the outcome of the British referendum on European Union membership on June 23.
Forecasters are almost unanimous in expecting a vote to leave will damage the UK economy and could push the Bank of England to cut interest rates.
In the euro zone, economists said lacklustre demand, not inadequate credit, is holding the euro zone economy back. They say the European Central Bank is unlikely to cut its deposit rate further from the current -0.40 percent.
That too underscores the diminishing returns from monetary policy, especially since the ECB is well over a year into its trillion-plus euro stimulus programme, has cut rates several times and pledged long-term loans to banks, with little pick-up in inflation so far.
Among emerging markets, India is one of the few exceptions with a stable outlook, while pessimism over Latin America's economic growth has grown.
(For other stories from the Reuters global economic poll:)
(Polling, analysis and additional reporting by Reuters Polls Bengaluru and bureaus in Kuala Lumpur, Bangkok, Seoul, Manila, Jakarta, Hong Kong, Hanoi, Taipei, Sydney, Berlin, Paris, Milan, Stockholm, Oslo, Johannesburg, Istanbul, Toronto, New York, Brasilia, Mexico City, Lima, Buenos Aires, Bogota, Caracas, Santiago; Editing by Ross Finley and Toby Chopra)
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