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The Potential $1.5 Trillion Stimulus Plan Investors Are Missing
by Simon Kennedy
June 2, 2015 — 5:39 AM ART

Global governments need to deploy Plan B to revive a lackluster world economy.

Reluctant to spend their way out of trouble even with rock-bottom borrowing costs and with central banks warning easy money can’t power expansion alone, political leaders may soon give up on demand and try to spur supply.

Making economies more productive and competitive would raise so-called potential growth rates, enabling expansions to accelerate by more before sparking inflation. A lift is needed given economists at JPMorgan Chase & Co. reckon global trend growth will drop to 2.4 percent by 2020 from about 3 percent in the last decade.

“The supply side is taking over from the demand side and we’ll soon see hard evidence of that,” Martin Malone, a global macro policy strategist at London-based brokerage Mint Partners Ltd. said in a telephone interview.

Malone eyes three ways politicians are seeking to improve economic health: boosting trade, the participation of women in labor forces and infrastructure investment.

He estimates a full supply-side revolution could be enough to deliver an extra 2 percentage points to global growth each year. That’s the equivalent of about $1.5 trillion, more than the European Central Bank’s current bond-buying program, and in Malone’s view, a buy signal for stocks and a sell signal for bonds.
Structural Reforms

Promises to deliver structural reforms often flop as politicians realize their short-term effects could cost them power. Japanese Prime Minister Shinzo Abe’s so-called third arrow has yet to really take flight.

Malone is more upbeat, noting a change in tone as Group of Seven leaders prepare to meet in Germany this week amid greater political stability from the U.K. to India. U.K. Chancellor of the Exchequer George Osborne, for example, is promising to deliver a productivity plan next month.

“It is better to start structural reforms now instead of waiting for a point in time which is assumed to be better but which will never materialize,” Bundesbank President Jens Weidmann said after G-7 finance chiefs met last week. “Structural reforms need time to yield their intended or desired outcome and therefore we have to act now.”

On trade, Malone notes U.S. lawmakers are poised to pass a fast-track trade bill which should open the way to several commerce deals including the Trans-Pacific Partnership with 11 other countries. The result would not just be stronger demand, but more competitive pressures and cross-border investment.
Infrastructure Investment

As for infrastructure, Malone sees efforts to double the $2 trillion now spent on it and to back projects that increase productive capacity and lure in private sector cash. China is leading the creation of a $100-billion Asian Infrastructure Investment Bank. In response, Japan and the Asian Development Bank plan to boost funding for similar projects in the region to about $110 billion over the next five years. European Union President Jean-Claude Juncker has pitched a plan too.

“We’re focusing on what is going to happen,” said Malone. “The bottom line is we have to see something and concentrate on what we’ve not seen already and that is supply side reform.”

He’s not alone. At JPMorgan, chief U.S. economist Michael Feroli argues full employment in the U.S. alongside trend growth that may undershoot his already-pessimistic 1.75 percent estimate augurs for government efforts to drive labor force growth and investment.

In Europe, Royal Bank of Scotland Group Plc analysts told clients on Monday that the region could better deal with its debts by freeing up fiscal rules to invest more in education and research, reviving productivity.

“The times are changing,” Feroli told clients in a report last week.



http://www.bloomberg.com/news/articles/2015-06-02/the-potential-1-5-trillion-stimulus-plan-inves