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2020 Global Outlook: Testing limits

Policy pause

We see economic fundamentals driving markets in 2020, with less risk from trade tensions and less scope for monetary easing surprises or fiscal stimulus. Major central banks appear intent on maintaining easy policies – and interest rates and bond yields look likely to linger near lows.

Implication: Income streams are crucial in a slow-growth, low-rate world. We like emerging market (EM) and high yield debt.

Limits to stimulus
Monetary and fiscal impulses in major economies, China, 2002-2020

Monetary and fiscal impulses in major economies, China, 2002-2020
  • Source

    BlackRock Investment Institute, with data from the IMF and Refinitiv, November 2019. Notes: We used 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 2019 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 of monetary easing 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.

  • We see economic fundamentals driving markets in 2020, and less scope for monetary easing and other policy surprises. The bar for further easing by the Federal Reserve looks to be high — with no policy action barring a significant growth slowdown or an unwanted tightening in financial conditions.
  • Elsewhere, the European Central Bank (ECB) and the Bank of Japan (BoJ) may deliver further monetary easing given persistent inflation undershoots. Both central banks have limited policy space left, however, and the side effects of negative rates – particularly on banks’ profitability and ability to lend – increasingly undermine their policy efforts.
  • The policy debate will increasingly focus on a potential hand-off from monetary to fiscal stimulus. This echoes our call for greater coordination between monetary and fiscal authorities to deal with the next downturn. We don’t see this happening in 2020 – indeed, fiscal policy is set to become a little less easy. The Limits to stimulus chart shows this in the small movement toward the left in 2020.

Bottom line: We believe the dovish pivot by global central banks is largely behind us, and see limited prospects for a handover to fiscal stimulus.

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
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
Head of Macro Research, BlackRock Investment Institute
Elga Bartsch, PhD, Managing Director, heads up economic and markets research at the Blackrock Investment Institute (BII). BII provides connectivity between BlackRock's ...
Mike Pyle
Chief Investment Strategist, BlackRock Investment Institute
Mike Pyle, CFA, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy function within the BlackRock Investment Institute ...
Scott Thiel
Chief Fixed Income Strategist, BlackRock Investment Institute
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 ...