Eurozone: Fiscal stimulus to lift the GDP growth? – ABN AMRO

According to Aline Schuiling, senior economist at ABN AMRO, the impact on Eurozone’s GDP growth of any fiscal stimulus always is less than one-on-one, as part of the stimulus leaks away via higher imports, higher cyclical government tax income and higher private sector savings.

Key Quotes

“The shape of the stimulus is also relevant for its impact, with direct government spending or investment having a more direct and often stronger impact on growth than indirect stimulus such as tax cuts. As a rule of thumb, a fiscal stimulus equal to 1% of GDP, lifts eurozone GDP by around 0.5-0.7%. This means that our range of estimations of the room for fiscal stimulus could lift eurozone GDP growth by between around 0.25 and 0.75 pps.”

“Depending on the shape and size of the stimulus, it could start having an upward impact on growth in the course of 2020.   Our current base case scenario is that growth will remain stuck at modest levels well below the trend rate throughout 2020.”

“A fiscal stimulus package in line with maximum potential size according to our calculations (around EUR 160bn) could lift growth to close to the trend rate in the course of 2020. Still, governments are not moving very quickly, so we might stay at the lower end of the range of potential stimulus.”