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?


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.

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.