Overview
Compared with the Global Financial Crisis in 2008, when governments relied more on monetary policy, the most critical tool of economic support amid the coronavirus crisis has been the fiscal firehose. This time around, governments in developed markets quickly deployed exceptional fiscal measures, including direct transfers to buffer household incomes and loans to businesses to keep more people employed.
As a result, as we reach the end of 2020, headline fiscal deficits in advanced economies are five times higher than where they were a year ago. That’s a huge increase.
What’s more, additional measures are likely in the coming months. Despite the smaller size of US fiscal stimulus than would have been the case had the democrats swept the recent elections, government spending is likely to continue for some years to come. The International Monetary Fund (IMF) has called on developed-market countries to take advantage of the low rates put in place by central banks and to continue to borrow heavily, a reversal of the austerity it preached in the aftermath of the 2008 crisis.
Emerging markets (EMs) have also expanded debt to record levels, and we expect a bifurcation in performance between higher and lower quality sovereigns.
EMs include some of the world’s fastest growing major economies, such as India and China, and, despite the setbacks of 2020, their growth rates in many cases have proven more resilient, remaining well above those of developed market countries. However, among frontier markets with rising debt levels or countries with less diversified sources of financing, we may see a rise in defaults and restructuring events. The IMF is likely to proactively encourage debt restructuring and will be working with low income country governments more closely in the future.
In our view, how governments around the world navigate and manage these high debt loads will remain one of the biggest macro drivers of global economic progress and the policy cycle in the coming quarters. For more details please see Fidelity International’s Outlook 2021, which lays out our detailed views across regions and asset classes.
