Governments can’t prevent the next global economic slowdown

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In the decade since the financial crisis, central bankers around the world have taken on the mantle of reinvigorating the global economy. By keeping interest rates low and buying up trillions of dollars’ worth of government bonds and other assets, these institutions helped to prop up growth at a time when the world desperately needed it.

Of course, that era of easy monetary policy is coming to a close. On Thursday, the European Central Bank said would end its crisis-era stimulus progamme this month, although it will still reinvest in the region’s bond markets. Ahead of next week’s meeting on monetary policy, the Federal Reserve is gearing up for its ninth interest rate increase since it began normalising rates in December 2015. And Japan’s BOJ is considering the same, although in fits and starts.

As central banks turn off their spigots of easy money, governments around the world are stepping in to fill the void. But even with these measures, the global economy is set to slow in the coming years.

President Trump spearheaded this fiscal loosening in early 2017 with a large corporate tax cut, which Republican-controlled Congress followed up with a $1.3tn spending bill. And to grapple with its own domestic slowdown, China has instituted a number of stimulus measures, including tax cuts; reducing the amount of cash banks must hold as reserves so financing costs come down; and stepping up lending to local authorities, which they can then dole out themselves.

Now, a handful of countries are starting to spend more as well. So much so that for this year and the next, the global fiscal impulse — which measures how much governments’ fiscal policy adds to or subtracts from overall economic growth — is set to get even more positive. Meaning that state spending is becoming a tailwind. Citi’s Dana Peterson says this trend will continue through 2019 before reversing the year after that:

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