In recent decades, the experience in many countries has been that the decline of the public debt ratio during expansions did not compensate for the increase during recessions. This could end up creating concern about sovereign risk and influence the borrowing cost. Under the assumption of permanent reinvestment of maturing paper, significant holdings by the central bank of government paper as a result of quantitative easing, could limit this risk. This depends on the interest rate on excess reserves and on whether such a policy ends up generating higher inflation and/or inflation expectations.
For several weeks now, the improvement in economic data has been slowing down. On the one hand, this loss of momentum is unsurprising as it followed a substantial rebound which could not last. On the other hand, this fall could reflect the economic reaction to the rise in the number of new Covid-19 cases in many countries. Furthermore, the level of uncertainty which remains very high, affecting households and businesses, should also play a role. As a result, monetary and especially fiscal policies remain crucial in ensuring that the recovery continues pending the release of a vaccine.
The Fed’s new inflation averaging strategy should have global real and financial spillover effects. The former refer to international trade whereby a more sustained expansion of US GDP should pull along the economies of its trading partners via increased US imports. The financial spillovers are driven by capital flows, monetary policy and risk appetite. These factors are highly intertwined. The new Fed strategy will also force other central banks to revisit their own strategy. This creates an issue for the ECB.
Unsurprisingly, this week’s GDP numbers for the second quarter were exceptionally bad. The third quarter should see strong quarterly growth, if only because of a powerful base effect. It also leaves room for disappointment however, should the growth momentum start to slip over the summer. In the US, this already seems to have started. In the euro area, business surveys continue to improve and the employment expectations indicator sees a marked increase. Households are not convinced however and their unemployment expectations have remained broadly stable.
Due to the externalities of economic activity, the lockdown has had a considerable impact, not only on the economy but also on the environment. In a post-lockdown world, the question is how and to what extent the experience of the pandemic will influence the environment in the years to come. Covid-19 may make people more health-focused, including how the environment influences one’s health. This may change behaviour in terms of mobility and spending. It may also cause an increase in the allocation to sustainable investments, which in turn could influence corporate strategies. Changes in global value chains can also have an environmental impact
The bleak outlook for the labour market implies there is a strong case for measures to boost consumer spending in order to keep the recovery on track. A host of instruments can be considered: vouchers, VAT rate cuts, income tax cuts, tax credits, negative income taxes. Amongst these, a voucher programme offers many advantages given the possibility for fine-tuning the target group, the final beneficiaries, the type of spending and the regional dimension. However, it comes with considerable administrative costs.
With an increasing number of countries scaling back if not removing the lockdown measures, the purchasing managers’ indices have improved further in June. The world manufacturing PMI is now even above the level reached in February. Big increases have been noted in the US, France, Germany, Ireland, Spain, Turkey, Indonesia and Vietnam. Brazil and India have also seen a considerable improvement, which seems at odds with the health situation in these countries [...]
This document presents the budgetary and monetary measures taken in several countries as well as the EU and the eurozone to address the economic consequences of the Covid-19 pandemic. It is presented in such a way that it facilitates an international comparison.
The publication by the ECB of different economic scenarios illustrates the extent of uncertainty which at present surrounds the forecasts for key macroeconomic variables. As a consequence, companies may hold off investing, preferring to wait for better visibility. While understandable at the micro level, such a wait-and-see attitude could act as a drag on growth and reinforce the view of companies that their caution was warranted. The large increase in the dispersion of earnings forecasts points to huge uncertainty at the individual company level. However this has not stopped the US equity market from rallying. Although several factors help to explain these different reactions to uncertainty, such dissension cannot last forever
The gradual easing of lockdown measures has for the month of May, as expected, led to an improvement in the manufacturing PMIs in all countries with the exception of the Netherlands and Japan. The extent of the rebound however varies greatly between countries [...]
The Covid-19 pandemic shows that the supply side warrants greater attention when conducting macroeconomic analyses. Very long global value chains may be optimal from a cost and price perspective, but operationally may be very complex and, in particular, fragile. A more resilient supply side comes with a cost, both at the micro and macro level. Solving this trade-off in a market economy is difficult, which, to some degree, leaves a role for public policy.
The Covid-19 pandemic has caused a jump in most of our uncertainty indicators. The media coverage based indicator is now at a record high. After stabilising at a high level, uncertainty of German companies has increased further whereas it has seen a big jump for US businesses. The behaviour of geopolitical risk is an exception...
Major economic policy responses have been introduced to try to attenuate the impact of the Covid-19 pandemic on the economy. This document reviews the key measures taken by central banks and governments in a large number of countries as well as those taken by international organisations. It includes measures that were introduced through 10 April. It will be updated regularly.
Depending on the source, estimates of the number of ‘cryptocurrencies’ vary between 1,600 and 3,000. These crypto-assets struggle to fulfil the three economic functions of money, and so cannot be considered as such. Although their fairly modest uptake currently limits their economic impact, increased use could create risks in the transmission of monetary policy, money creation and financial stability. Several central banks are looking at the introduction of a ‘central bank digital currency’ (CBDC) in response to these challenges. However, far from being simply a substitute for private cryptocurrencies, these CBDCs would carry specific risks in terms of financial stability, most notably that of a ‘digital bank run’
Cities today concentrate more than half of the world population and more than 80% of global GDP. The underlying dynamics explaining their ever increasing importance are the result of a variety of positive externalities (thicker labor markets, knowledge spillovers, input sharing…) generating self-reinforcing effects. These rapid waves of urbanization have key implications for the production of goods and services, environmental quality and human development. The world is one of density spikes and disparities, driven by the unstoppable ascendance of metropolises. Greener and more inclusive cities should be promoted in order for them to remain livable. In this respect, public policies have an important role to play
The Paris climate deal, concluded at the COP21 in 2015, pleads for keeping global warming below 1.5°C above pre-industrial levels. However, in its latest report, the IPCC (Intergovernmental Panel on Climate Change) warns that current mitigation policies are insufficient to obtain this objective. Investments in renewable energy and electricity infrastructure have to be stepped up. The power sector has to be decarbonised, the use of electricity increased, and energy efficiency improved. Low carbon policies are difficult to implement because of commercial interests and social impact, in particular concerning the increase in carbon prices
Participants at the Paris Climate Conference COP21 agreed that global warming should be limited to 2°C. This would be the case if carbon concentrations could be stabilised at below 450 parts per million (ppm). However, simulations with climate models show that even at this level the risk of overshooting the 2°C limit is not negligible. From an economic point of view, it would be optimal to take early measures to reduce tail risks. To overcome public reluctance to make small sacrifices now to avoid substantial future damages, climate policies should be appropriately framed.
At a given moment during the month of February, the S&P500 was down 10% from its historical high. Using the commonly used definition, this meant it was in correction territory. This was considered by some as a healthy correction whereas others argued it might very well mark the beginning of an era of structurally higher volatility. Econometric research and model-based simulations show that the economic impact of equity market corrections is rather small. The stylised facts however show the key role of the reciprocal influence between equity markets and growth expectations. In this respect, particular attention should be devoted to the evolution of the corporate bond spread.
In May 2017, Donald Trump triggered a renegotiation of the North American Free Trade Agreement (NAFTA). Some proposals, 23 years after NAFTA came into force, aiming to introduce a chapter on the digital economy and strengthen the agreement’s current arrangements, have been generally welcomed. Others, such as a tightening of rules of origin and changes to trade remedies, have prompted concern.
In November 2016 the Bank for International Settlements (BIS) published an updated economic impact study of Basel III and the ongoing reforms, suggesting the existence of some room for manoeuvre in the creation of additional capital buffers. We demonstrate in this analysis that this room no longer exists in the eurozone, where the dominant role played by banks in financing increases the economic cost of new regulatory requirements and reduces the optimal bank solvency ratio, above which the economic cost exceeds the estimated benefit of tighter regulation.
World trade has slowed sharply compared to global GDP growth since 2012. Is the slowdown in world trade due to cyclical factors, and sluggish investment above all others? Or is it due to more far-reaching structural changes, in which case world trade is unlikely to return to the vigorous growth rates observed from the mid-1990s to the mid-2000s.
