The time has come for expansionary fiscal policy, say economists

Singapore

WITHOUT a full-blown recession, expansionary fiscal policy still looks unlikely, but the topic is gaining ground, Swiss-Italian economist Beatrice Weder di Mauro noted on Thursday.

Her comments came on the heels of central bank chief Ravi Menon's statement that not every economic threat is tackled by monetary policy.

"Unless there is really a clear recession now, I don't think we're going to see huge expansion on the fiscal side, in the countries of Europe, for instance," said Dr Weder di Mauro, president of Europe's Centre for Economic Policy Research, at a panel of economists put together by Swiss bank UBS.

"But that's where the discussion is going: Okay, monetary policy has done its part, and now it's up to fiscal policy - large-scale investment."

Fellow panellist Hu Yifan, UBS Global Wealth Management's regional chief investment officer and chief China economist, echoed this sentiment. Given "pretty low" interest rates, "now is the time for the fiscal policy to take a role", such as through infrastructure investment, she said.

With the key recession question being "when", UBS expects an economic turning point next year, Dr Hu added.

"We still need to keep investing, but we have to be more diversified and also manage downside risks."

Mr Menon, managing director of the Monetary Authority of Singapore (MAS), told Bloomberg that there may be "unrealistic expectations" for central banks to prop up struggling economies.

"It can't be that every slowdown, every risk or threat on the horizon has to be addressed by a loosening of monetary policy," he said, according to a report on Thursday, while noting that the MAS, which taps monetary policy to ensure price stability, does not have to rely on tools like negative interest rates and quantitative easing.

Elsewhere, as countries flirt with negative interest rates in what could be "the new normal", Dr Weder di Mauro has floated central bank-issued digital currencies as a solution. "As long as there is cash around, there is an effective lower bound of how negative you can go," she noted.

But she conceded that such currencies are unpalatable to investors, asset managers and others "because it would really be changing the financial system as we know it . . . so everybody is hoping we're going back to the world of positive interest rates".

Indeed, Mr Menon has told The Business Times that he does not see why digital currency should be issued by central banks, which he said are not equipped to be lending it out.

But Dr Hu alluded to China's plans, mooted in recent weeks, to roll out a digital yuan. Beijing likely anticipates sovereign countries to issue digital currencies, she said, while the International Monetary Fund could launch a supra-digital currency for its institutions - "so China cannot be left out".

"Not only China - probably other countries are putting (in) a lot of effort . . . We could probably expect some kind of digital currency to come out in the coming years," Dr Hu suggested.