TalkingEconomics: Is it time start the helicopters?

Central banks are pushing their monetary easing programmes further out yet global growth is slowing. Is helicopter money the next logical step?

5 May 2016

Schroders Economics Team

The International Monetary Fund (IMF) has downgraded its forecasts for global growth.

The IMF calls for more fiscal policy, but for countries with high public debt (like Japan), the only option may be monetisation. Is it time to start the helicopters?

The IMF recently downgraded its global growth expectations, despite commodity prices and business surveys that point to a brighter outlook for the global economy.

It is likely that the “Q1 effect” in the US has caught forecasters out yet again. This is the tendency for statisticians to underestimate Q1 GDP as they struggle to fully account for seasonal fluctuations in economic activity.

Given the size of the US economy, this effect accounts for a significant part of the IMF downgrade. The good news is that there is less bias in subsequent quarters, creating scope for a recovery in Q2.

Bounce ahead, but the pattern of downgrades persists

That said, 2016 is set to be the sixth consecutive year in which economists have had to substantially revise down the forecasts they made at the beginning of the year, owing to over-optimism about supply and demand.

This suggests that after a short-term bounce we will be back to slow growth. This is a serious problem for politicians and governments now caught between the need for austerity to control borrowing and fiscal expansion to boost growth.

Japanese monetisation options

Nowhere is this more acute than in Japan where public debt continues to rise but a weak economy and softening inflation expectations means fiscal stimulus is on its way.

We also expect further stimulus from the Bank of Japan (BoJ) by the end of the year. This could be a “helicopter drop” of newly created Japanese yen into personal bank accounts amounting to monetisation (government spending with no increase in liabilities).

We would not rule this out completely but it is possible that monetisation arrives through a different route.

We could well see a situation in which the government writes off a large chunk of the increasing amount of government debt that the BoJ holds, or switches the debt into an ultra-long dated zero coupon bond. Such a restructuring would be a default, but on its own bank.

The ratings agencies would downgrade Japan, but the impact on yields and future borrowing costs could be contained, for example, by further quantitative easing (QE).

Nonetheless, the currency could fall sharply as international investors take fright at debt that will have effectively been monetised.

Clearly, we are some way from this and no other economies face quite the same challenges. However, such musings indicate where QE may end up if growth does not improve.

As the European Central Bank pushes its own QE programme further out and widens the range of its asset purchases, what is happening in Japan may be seen as increasingly relevant.

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