2020 Global Outlook: Testing Limits

Policy action

  • Sources: BlackRock Investment Institute, with data from the IMF, OECD and Refinitiv Datastream, February 2020. Notes: We use weights based on GDP in purchasing power parity terms in the calculations. Monetary impulse refers to the change in the gap between inflation-adjusted real policy rates and neutral rates in G3 economies (the U.S., Japan and euro area). Neutral rates are estimated based on our November 2018 paper, taking into account financial cycle dynamics. Fiscal impulse is defined as the change in the cyclically adjusted primary budget for G3 and China. 2020’s estimated path implies mild fiscal stimulus consistent with views from the IMF, OECD and brokers, and an additional 10bps monetary easing in G3 countries. The impact of monetary easing in China is not included to calculate the fiscal impulse due to its limited influence on growth and the lack of a consistent estimate for the neutral rate.

  • A sustained tightening of financial conditions or impairment to market liquidity could be met by coordinated policy easing by major central banks even though many, such as in the euro area and Japan, have limited policy space. China has eased monetary policy as a first response to cushion the drag from the coronavirus outbreak.
  • Fiscal policy will likely be part of the toolkit, with governments ramping up public health spending and providing relief to the hardest hit industries and regions. Overall, fiscal policy looked set to become a little less easy in 2020 as the year began, as the chart above shows, but the coronavirus outbreak tilts the risks toward greater fiscal spending.
  • Such policy action to limit the economic fallout from the virus outbreak will push monetary and fiscal policy closer to their limits, narrowing the policy space available for fighting the next downturn.
  • The U.S. and China have strong incentives to maintain the pause on their trade conflict, though there may be more turbulence ahead in global trade, particularly if U.S. trade measures shift to Europe.

Bottom line: Additional policy easing has become more likely in 2020, although many central banks have diminished policy space to cushion any downturn.

Meet the authors
Philipp Hildebrand
Vice Chairman
Philipp Hildebrand, Vice Chairman of BlackRock, is a member of the firm's Global Executive Committee. He is also Chairman of the Financial Markets Advisory (FMA
Jean Boivin
Jean Boivin
Head of BlackRock Investment Institute
Jean Boivin, PhD, Managing Director, is the Head of the BlackRock Investment Institute (BII). The institute leverages BlackRock’s expertise and produces proprietary ...
Elga Bartsch
Elga Bartsch
Managing Director, Head of Macro Research of the BlackRock Investment Institute
Elga Bartsch, Managing Director, is Head of Macro Research of the BlackRock Investment Institute. Elga heads up economic and markets research of the Blackrock Investment ...
Mike Pyle
Chief Investment Strategist, BlackRock Investment Institute
Scott Thiel
Scott Thiel
Chief Fixed Income Strategist
Scott Thiel, Managing Director, is Chief Fixed Income Strategist for BlackRock and a member of the BlackRock Investment Institute (BII). He is responsible for developing ...