Navigating the Global Fiscal Landscape: China avoids the expectant bandwagon.
Benjamin Nathan Otchere, FPWMP
Fund Management | Economics & Finance | Financial Literacy | Financial Planning
The World Economic Forum graphic above sheds light on what chief economists in different areas anticipate will happen to fiscal policy in 2024. This respondent focuses on the expectations for fiscal policies, including whether they should be tighter, looser, or unchanged. At the back of these expectations, I provide suggestions for investors and business firms with strategies they can decide to initiate and implement. Before we go into what some chief economists have to say, let's define and remind ourselves what a fiscal policy is and how it functions in an economy.?
Fiscal policy is the use of taxation and expenditure by the government to affect the economy. It is essential to control economic growth and stability. Governments try to manage inflation, lower unemployment, and foster overall economic stability by varying tax rates and expenditure levels. There are two types of fiscal policy: expansionary(looser) and contractionary(tighter). To promote economic growth, expansionary fiscal policy entails raising government expenditure and/or lowering tax rates. This is usually employed when the economy is in a slump or recession. In contrast, contractionary fiscal policy involves raising taxes and/or reducing government spending to rein in inflation and calm down an overheated economy (Mankiw, 2019).
The time of implementation and the state of the economy are two elements that affect how effective fiscal policy is. It is a crucial instrument that governments use to guide their economies toward specific goals while striking a balance between stability and growth (Mankiw, 2019).
The Asia Area
In China, fiscal policy is expected to be predominantly looser (67%), with some areas unchanged (25%) and a minority tighter (8%). This indicates increased government spending aimed at stimulating the economy. The following statement from Fitchwire supports this looser expectation. It mentions that a consolidated deficit objective of a little over 7.0% of GDP this year 2024, as opposed to 5.8% for 2023, is indicated by the budget details on a Fitch-consolidated basis as stated on the Fitch Ratings website. This considers infrastructure investment and other government activities beyond the headline budget (Fitch Rating, 2024). According to Fitch Wire, “in 2023, fiscal policy was predominantly contractionary, only becoming supportive in the latter half. We anticipate that this trend toward looser policy will persist. Spending plans are still centered on building infrastructure, with less support given to consumer consumption(Fitch Rating, 2024).” Therefore businesses may want to explore expansion opportunities in manufacturing, infrastructure, technology, and consumer sectors. Investors should focus on equities in growth sectors such as technology, manufacturing, infrastructure, and consumer goods, which will most likely benefit from the increased government spending.
In Central Asia, fiscal policy is expected to remain largely unchanged (70%), with some regions experiencing looser (25%) or tighter (5%) policies. This suggests fiscal stability with a slight inclination towards expansion to support economic growth. Businesses should continue their current strategies while planning potential expansions if fiscal policies become more relaxed. Investments should target a mix of stable and growth-oriented sectors, particularly infrastructure and consumer goods.
In East Asia and the Pacific, fiscal policy expectations are balanced between looser (65%) and unchanged (30%), with a small portion tighter (5%). This outlook suggests favorable conditions for fiscal expansion to support economic growth. Businesses should consider strategic expansions and capital investments in markets with looser fiscal policies. Investment should focus on growth sectors such as technology, infrastructure, and consumer goods, which are poised to benefit from increased government spending.
In South Asia, fiscal policy is expected to remain predominantly unchanged (62%), with some regions becoming looser (19%) or tighter (19%). This indicates a stable and balanced fiscal approach. Businesses should maintain their current strategies, focusing on efficiency and cautious expansion. Investors should consider a balanced portfolio, including stable sectors like utilities and growth opportunities in technology and consumer sectors.
The Americas
In the American economic region, the fiscal Policy expectation is predominantly unchanged with 67% for the USA and 71% for Latin America and the Caribbean. In as much as economists anticipate a stable or unchanged fiscal policy, there is a chance for some expansionary strategy to fast-track economic recovery even though that is on the low side. The Americas with 26% looser is higher than the Latin America and Caribbean at 19%. However, there is a minimal expectation for contractionary fiscal policy. The economic giant contractionary expectation for 2024 is 7% tighter which is less than 10% for the Latin Americans and Carribeans. Predominately pursuing an unchanged or stable fiscal policy indicates continued government spending levels and taxation policies, with some potential easing to support economic activities.
The United States has been pursuing an expansionary policy putting its debt-to-GDP ratio at almost 97% at the end of FY 2023, which is comparable to (but marginally higher than) the ratio at the end of FY 2022(Bureau of the Fiscal Service, 2024). The average debt-to-GDP ratio is 51% (1980-2023), this is lower than the actuals of 2023 FY as stated above(Bureau of the Fiscal Service, 2024). What will the implications be for businesses and the financial markets if chief economists’ expectations stay unchanged? To grow their market share, companies may want to maintain current growth strategies, with an optimistic approach toward new investments in infrastructure and technology. This will help in increasing bottom lines and shareholder value maximization. On the investment front, it is advisable to focus on stable sectors such as healthcare and utilities, while also considering potential growth opportunities in technology and infrastructure-related industries.?
By expectation we should see an unchanged fiscal policy direction but how does that affect the Latino and Caribbean business environment? Latin America and the Caribbean's fiscal condition in 2022 was marked by increasing tax receipts and decreasing public spending, which led to reduced fiscal deficits and the level of public debt is still considerably high (NU.CEPAL, 2024). As a result, businesses will incur significantly higher taxes, and the government will refrain from spending due to the substantial budget deficit and elevated debt levels. High unchanged expected policies indicate stability and predictability, beneficial for long-term planning for both investors and businesses even though slow economic growth looms. Also, investors may watch out for growth stocks if the expectation of looser monetary policy materializes as envisaged by chief economists(check out my previous article, link below).
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Europe Area
The fiscal policy expectation in the eurozone is mixed with 46% unchanged, 32% tighter, and 21% looser. This implies a mixed outlook which indicates varied fiscal policies across different European countries, with some focusing on austerity policies and others on fiscal expansion. There is a high potential of the euro countries implementing a contractionary policy even though expectations are skewed toward a stable fiscal policy. According to the Euro Stability and Growth Pact, euro countries are supposed to have a deficit of 3% of GDP.?
Historically, it has been a mixed policy but from 2020 till date the euro zone countries are pursuing a contractionary policy moving its deficits from 7%(2020) to 3.6%(2023). If this goes unchanged as expected by most chief economists then deficits could further drop and reduce its gross debt to GDP which currently sits at 88.6% higher than the benchmark of 60% of GDP per the pact(European Central Bank, 2023)
Businesses may prepare for different fiscal environments focusing on business operation efficiency and cost management which is very key with potential opportunities in countries with expansionary or looser policies. This can lead to shareholder value maximization. Businesses may play along tactfully as and when policy direction changes.
Investors can consider a diversified portfolio, including defensive stocks in countries with tighter policies and growth stocks in those with looser fiscal policies.
The Africa Area
In the Middle East and North Africa (MENA) region, fiscal policy is expected to remain largely unchanged (58%), with some countries tightening (26%) to manage budgets and inflation, and a minority loosening (16%). This suggests predominantly stable fiscal policies, with specific countries potentially adopting tighter measures. Businesses should focus on operational efficiency and cost management while pursuing cautious growth strategies. Investments should be defensive, targeting stable sectors such as energy and finance, with careful monitoring of any fiscal policy changes.
In Sub-Saharan Africa, fiscal policy is expected to remain predominantly unchanged (84%), with a small portion becoming tighter (11%) and an even smaller portion looser (5%). This indicates a conservative and stable fiscal approach across the region. Businesses should maintain their current operations, emphasizing efficiency and cost management. Investments should be directed towards stable sectors like telecommunications and agriculture, which are likely to benefit from consistent fiscal policies.
Prepared by: Benjamin Nathan Otchere, FPWM
Disclaimer: This should not be construed as investment advice. This is for educational purposes. These are suggested economic opinions of the writer and will not take liability for any action implemented at the back of this information.
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