The age of austerity may be nearing an end as governments ease the fiscal cuts that restrained economic recoveries.
After three years of slashing budgets bloated by recession and the stimulus deployed to fight it, U.S. and euro-area officials are finding less need to retrench as their previous efforts and improving economic growth help narrow deficits.
This will allow them to tighten policy next year by the least since they began in 2011, according to estimates by the International Monetary Fund. The lender projects the fiscal reduction by Group of Seven nations will be almost half this year’s pace as the average budget shortfall drops to about a quarter of where it was just three years ago.
“The softening of the fiscal drag is likely to play an important role in supporting a pick-up in global growth,” said Jose Ursua, a New York-based economist at Goldman Sachs Group Inc., referring to the negative effect of budget-chopping on an economy.
Economists at Goldman Sachs and Deutsche Bank AG say the relaxation will help industrial economies almost double their rate of expansion next year to 2.2%, the most since the recovery from recession in 2010. The Federal Reserve -- including Vice Chairman Janet Yellen, nominated to be its next chairman -- already is taking note as it considers when to curtail its own stimulus.
Ursua calls the shift a “major contributor” to an acceleration in U.S. growth next year to 2.9% from 1.7% this year. That in turn helps explain why Goldman Sachs forecasts the Standard & Poor’s 500 Index will climb to 1,900 at the end of 2014 from 1,792.81 at 4 p.m. in New York yesterday.
In Europe, signs that the so-called peripheral economies such as Spain and Greece are getting more control over their budgets will reduce the “risk premium” investors demand to hold their bonds over similarly dated securities, according to Bill Street, head of investments for Europe, Middle East and Africa at State Street Global Advisors in London.
The gap between 10-year yields for Spain and Germany was 2.39 percentage points today, down from 6.5 points in July 2012. “You’ll see spreads coming in, definitely,” Street said.
Reduced austerity would end a period when governments raised taxes and cut public spending, reining in their economies, as they tried to restore the fiscal order they abandoned to fight the worldwide recession.