As the global economy threatens to slow down, central banks around the world have been slashing interest rates. But that alone may not be enough to boost growth, especially in some of Asia’s emerging markets, economists say.
Instead, more government spending is needed to lift economic activity, they say. “It takes two to tango,” Kunal Kumar Kundu, India economist at investment bank Societe Generale, told CNBC. He explained that greater government spending, alongside lower interest rates, could more effectively spark growth at a time when business sentiment has been badly hit by the ongoing U.S.-China trade fight.
Cutting interest rates lowers the cost of borrowing and increases money supply in the economy — that typically encourages consumers and businesses to spend and invest more. Meanwhile, an increase in government spending could create demand for goods and services, which helps to boost economic activity. In addition to the trade war between the world’s top two economies, global growth prospects have also been hit by uncertainties surrounding Brexit and subdued inflation, according to the International Monetary Fund.
Mitul Kotecha, senior emerging markets strategist at corporate and investment bank TD Securities, agreed that those economic threats may make it tougher for authorities to depend solely on monetary policies to lift growth.
“I think (rate cuts) will help, but whether they’re going to be sufficient to counter the negative trade pressures and global growth slowdown and impact is debatable,” he told CNBC. “It seems difficult to see just monetary easing on its own be able to withstand these pressures,” Kotecha said.
In August alone, central banks in India, Thailand, the Philippines, and even New Zealand cut their benchmark rates. The Bank of Thailand’s rate cut was the first in four years, while the Reserve Bank of New Zealand’s larger-than-expected easing brought lending rates to an all-time low of 1%.
Fiscal spending coming
Some governments in Asia have already embarked on fiscal measures.
Thailand’s finance minister on Friday announced a planned $10.2 billion government spending package, to counter the slowdown from the U.S.-China trade war and increasing strength of the Thai baht. The proposal has yet to be approved by the cabinet. More emerging Asian economies could follow suit.
“You may see governments intensify fiscal spending alongside lower rates … I think there’ll be pressure on governments across Asia to bump up fiscal spending through infrastructure and other fiscal measures,” Kotecha said.
India, however, faces a complex situation.
Floods in the southern and western parts of India may result in inflation due to food supply shocks, said Prakash Sakpal, Asia economist at Dutch bank ING. Should the central bank continue to ease monetary policy and cut interest rates, overall inflation could climb further and potentially hurt the economy.
Yet, the government may not have room to spend more, said SocGen’s Kundu.
Prime Minister Narendra Modi’s government has been trying to keep spending in check. In its full-year budget presented early July, the government said it aims to reduce fiscal deficit for the current financial year from 3.4% of GDP to 3.3%. On top of that, a liquidity crisis in the financial sector has restricted lending to the broader economy. That has resulted in consumption being scaled back, as seen in a slump in auto sales.
“All of this put together, it’s a big toxic mix of things that has happened for India, and that has really impacted the economic activity,” said Kundu.