from Follow the Money

A global stimulus shortage …

March 5, 2009

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China doesn’t exactly want to make it easy to evaluate the size of its stimulus. Bragging about the small size of your fiscal deficit -- especially in relation to the US deficit -- suggests a rather modest effort. A bigger Chinese deficit afterall would allow the US to run a smaller deficit without shortchanging global demand. The IMF’s analysis – which looks at the change in the balance of the general government – puts China’s stimulus at about 2% of its GDP in 2009 and 2010, roughly the same as the US effort in 2009 and less than the US effort in 2010.

Given China’s current account surplus, its abundant domestic liquidity (the government – per Stephen Green of Standard Chartered) had deposits at the central bank equal to 9% of its GDP, and limited government debt (at least explicit debt), China could and should do more. And maybe it is: telling the state banks to lend to support local infrastructure projects could be considered a form of stimulus (the TALF could be considered such a stimulus too; both try to keep the flow of credit going to sectors that will spend or invest). It just isn’t the kind of stimulus that looks likely to spur China to consume more. And it isn’t clear how quickly those infrastructure projects will be started, and thus provide real support for activity.

At this stage, though, I would be happy if China just did enough to keep its current account surplus from rising. That is the acid test. So long as the surplus is rising, China is subtracting from global demand growth not adding to it. China could meet its 8% growth target without any contribution from net exports if all other parts of China’s economy kept growing at their previous pace – and with private investment growth slowing, that requires a surge in public investment or a big increase in consumption. But I would note that net exports can mechanically contribute to growth if imports fall faster than exports – not just if exports grow faster than imports.

But China isn’t the only part of the world that needs to do more. Europe’s economy contracted as fast as the US economy in q4. But Europe’s combined stimulus looks to be significantly smaller than either the US or Chinese stimulus. Bruce Stokes of the National Journal/ Congress Daily did the leg work:

The International Monetary Fund has called for a global fiscal stimulus of 2 percent of GDP. In 2009, U.S. and Chinese stimulus spending is likely to match or exceed that target. European stimulus will total less than half that amount. And spending in Brazil, South Korea and South Africa will also fall below the IMF goal, according to estimates by the IMF and J.P. Morgan. …

"In proportion of GDP," Jean Pisani-Ferry, director of the Brussels think tank Bruegel, wrote on the National Journal economics blog last week, "the size of the stimulus packages put in place in Europe [is] at best half the size of the U.S. and, unlike [the American effort] several of them are rear, rather than front-loaded." While Germany’s spending will amount to 1.4 percent of GDP in 2009, French outlays will total only 0.8 percent, and Italy has not put forward any meaningful fiscal boost at all …

"Any way you slice the numbers," wrote Ted Truman, a senior fellow at the Peterson Institute for International Economics, on the National Journal blog, "policymakers are falling short of real ambition in the face of the worst global downturn since the Great Depression."

That won’t cut it. Especially if Europe isn’t willing to do much to help Eastern Europe avoid a sharp adjustment, one that will cut into Eastern Europe demand for western European goods. Germans don’t want to bailout profligate governments (and profligate banks that financed profligate households) in the East. But their profligacy provided the demand that spurred Germany’s exports. Bailing out the East is an indirect subsidy for a host of German jobs ….

The G-20 still has some work to do if it wants to live up to its November commitment to take the steps needed to support global recovery. Policy makers, in my judgment, still haven’t gotten ahead of the forces that are driving a global contraction in demand.

* The IMF estimates of the size of different stimulus packages, as of the end of January, is on p. 18 of this document. The IMF estimated the global stimulus at 1.5% of world GDP. Other estimates have a higher number.

** UPDATE. Tao Wang of UBS estimates that China’s actual fiscal stimulus in 2009 will be a bit less than 2% of China’s GDP.

"Not all of the RMB4 trillion will be spent by the government. Of which, the central government plans to take on its budget RMB 1.18 trillion (of the RMB 4-trillion package), breaking down to RMB 104 billion in Q4 08, RMB 487.5 billion in 2009, and the rest in 2010. All of this is supposed to be additional spending. We think the actual impact of the funds disbursed in Q4 08 would be mostly felt in 2009, and this year’s budgeted increase is likely front-loaded. Combining the two, the fiscal stimulus stemming from the RMB 4 trillion plan felt this year is roughly RMB590 billion, or 1.8% of 2009E GDP. "

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