Research Briefing | Apr 14, 2021

Global | Overheating risk is real, but probably overstated

Overheating risk is real, but probably overstated - iPad

Could fiscal stimulus lead to economic overheating? Our assessment suggests that while that’s a risk, it’s not a foregone conclusion, even with large fiscal packages. There are also arguments for erring on the side of more stimulus rather than less, with policy options to rein in demand quickly if inflationary pressures start to pick up.

What you will learn:

  • Multipliers are also likely to be low for other stimulus
    categories too, including aid to businesses (well below 1
    according to the Congressional Budget Office).
  • An important component of the argument for overheating is the existence of a large overhang of “excess” savings built up in 2020 due to coronavirus restrictions.
  • A key determinant of whether a fiscal package risks overheating an economy is, in theory, the size of the output gap (the difference between actual output and its potential level).

Back to Resource Hub

Related Services

Post

Latin America Key Themes 2024 – Slower growth, but it’s not all bad news

Growth in most LatAm economies will be below consensus. Economic momentum has surprised to the upside through most of 2023, but the full effects of record global and domestic monetary tightening are yet to be seen.

Find Out More

Post

Easing financial conditions offer CRE some respite

Our measure of financial conditions has become less restrictive in the US and started to loosen in the eurozone and the UK, reflecting investors' expectations that interest rates have peaked. This should aid the outlook for commercial real estate (CRE) on the margins, although the scale of past rate hikes, sluggish economies, and structural headwinds mean the sector still confronts challenging fundamentals.

Find Out More