Holidays over for policymakers

07 September 2020 (7 min read)

Key points

The announcement of more fiscal stimulus contrasts with the emergence of disciplinarian noises here and there. The debate on tax hikes in the UK reflects idiosyncratic stress as the probability of no-deal Brexit is rising.
The debate within the European Central Bank on its policy stance in the face of currency appreciation and signs of deflationary pressure is also heating up, even if we don’t expect hard decisions this week.
Within emerging markets, we look at Turkey with particular concern.

By and large the dataflow continues to point upward for the global economy but as we expected the spectacular rebound of early summer is not sustained, with private sector job creation slowing down in the US and the Euro area PMI moderating. It is not surprising in this context to hear more on fiscal stimulus beyond the emergency response of the last few months, and France last week unveiled its own pluri-annual support package.
Some “disciplinarian noises” are emerging though. While Jens Weidmann’s fiscally hawkish speech last week probably does not have immediate consequences on policy-making, the debate on tax hikes is heating up in the UK and becoming more tangible. This is probably idiosyncratic to this country though, as it reflects unease in some segments of the British leadership with the status of the UK in international markets post-Brexit. On this front, the news-flow is concerning and unfortunately the probability of “no deal” is rising.
The ECB – through the voice of its chief economist – clearly welcomes additional fiscal support. Still, we continue to think that the central bank will have to extend in size and duration the Pandemic Emergency Purchase Programme, although we expect such announcement only by year-end. This week, we think Christine Lagarde will echo Philip Lane’s comments and acknowledge the euro appreciation as another headwind but without taking immediate action. The next steps will be politically delicate for the central bank.
During the Great Financial Crisis of 2008-2009, central banks in emerging countries had not been able to immediately engage in monetary easing along the Fed and their other DM counterparts. This time they did, and the “risk on” mood of the spring, bringing a measure of capital flows back to EM, has seemingly validated their approach. Risks continue to abound though, even irrespective of the pandemic, while capital flows have been plateauing for some time now. We continue to look at Turkey with particular concern

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