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