Darren Williams: So, we’re moving towards the end of the year. 2020 is almost upon us. What are the key macro themes that we should be looking out for next year?

Guy Bruten: Well, interestingly, I think some of the themes that have been in play for the last two or three years will continue to be in play over the next year. One of those clearly is the, the big rise in populist politics that we’ve seen globally. But our attention will also turn to some newer topics.

I think one of those is going to be around the effectiveness of monetary policy. After all, the ECB and the Bank of Japan are at the end of the road there, and what replaces monetary policy as we go through another year of disappointing growth. Is this the year that we’re going to see the return of fiscal policy as an active tool?

DW: So, I think for sure we’re going to need to see more stimulus in Europe, which, of course, is my area. And so, it’s been very clear from the ECB in recent weeks and months that they want to pass the baton for supporting the economy from monetary policy towards fiscal policy. They’re almost offering incentive to governments to go down that route. So, for example, Mario Draghi, the outgoing ECB president, has made the point to governments that if they want to get out of negative-interest-rate territory they’re going to have to stimulate their economies in order to achieve that. So, it’s almost a bribe to provoke the right action from governments.

GB: Well, it’s certainly a cooperative effort, right? That’s the same thing that we’re seeing in Japan as well, where the Bank of Japan has been very explicit and want to see more cooperation with the fiscal authorities in order to stimulate activity, in order to hope to drive inflation towards the target. And it’s pretty clear that these—as far as the Bank of Japan goes—that they put in place the architecture to support further fiscal stimulus, courtesy of their yield-curve control program. Do you think there’s a similar sort of thing happening in Europe?

DW: I think to your point, it’s probably underappreciated by the market just how close Europe and the ECB are to being similar to Japan and the Bank of Japan. So, yes, I think the architecture is there. The ECB has restarted its QE program. It’s created a lot of fiscal space for governments if they want to use it. And I think that’s the problem at the moment. From what we can see of the plans that governments have put in place for next year, there will be a bit of fiscal support, but it’s not going to be enough to be a game changer next year.

GB: So, what do we think does change the game in terms of seeing more fiscal policy action?

DW: Now, we might see a far more aggressive fiscal response, but the only way we’re really going to see that is if growth really takes a turn for the worse and unemployment starts to rise. Those of course are things that we actually wouldn’t want to see. So that type of fiscal expansion, reactionary fiscal expansion, is not really all that good for economic growth.

What markets want to hear about is upfront significant fiscal expansion and that might happen in 2021 or 2022. But it’s not going to happen next year.

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