The composite PMI saw a big improvement in India, for the second month in a row, and to a lesser degree in the US and China. In these 3 countries, the index is at its highest level of the past 11 months. The euro area countries saw a mixed performance. Significantly better in Ireland, slightly better in Germany but weaker in France, Italy and for the euro area as a whole. There was a big drop in the UK...
Activity was already slowing before the new lockdown measures and the latter will act as an additional brake. We are living in a stop-start economy. The contraction of activity should be more limited than in March-April. The measures are less strict for economic activity, businesses are better prepared and exports should benefit from a more dynamic business environment, in particular in Asia, compared to what happened in spring.The stop-start recovery should also have negative consequences that go beyond the near term. Uncertainty may last for longer which entails increased risk of bigger scars like a rise in long-term unemployment or corporate bankruptcies. It may intensify disinflationary forces and increases the burden on public finances
For a large sample of developed economies, government debt as a percentage of GDP has been on a rising trend over the past 40 years. High public sector debt weakens the resilience of the economy to cope with interest rate and growth shocks. This calls for embarking, at some point in time, on a fiscal consolidation. Clearly, now is not the time. The economy is still recovering from the Covid-19 shock and the outlook remains highly uncertain. Nor is there any urgency, considering the very low interest rates. However, the absence of urgency in the near term should not make us forget about the necessity to act at a later stage. Otherwise, the resilience of the economy would weaken further. It would also represent a bet that in every downturn, central bank QE will come to the rescue.
On 16 September, the Single Supervisory Mechanism (SSM) for the euro zone announced the temporary exclusion of reserves with the Eurosystem from the calculation of leverage ratios at major banks. Similar relaxations had been introduced a few months earlier in the USA, Switzerland and the UK. The exceptional measures taken by public authorities to bolster liquidity have resulted in a significant expansion of banks’ balance sheets. Fearing that leverage requirements could hamper the transmission of monetary policy and affect banks’ abilities to lend to the economy, first regulators and then supervisors have temporarily relaxed such requirements
The Covid-19 pandemic will have profound longer-term consequences. Certain industries will benefit, directly or indirectly, whereas others will suffer.The idea of thriving industries full of new opportunities and others struggling to survive reminds us of Schumpeter’s creative destruction. Such a process can entail huge costs in the short run. Research shows the key role played by active labour market programmes. More broadly, economic policy not only needs to focus on the demand side but also, and increasingly, on the supply side so as to avoid that the pandemic acts as a lasting drag on growth.
A key question in assessing the pace of the recovery in coming quarters is what will happen to corporate investment. Financial analysts are expecting profits of US companies to increase. If confirmed, we can expect better cash flows which, based on historical relationships, should lead, with some delay, to a rise in capital formation by companies. However, there is a possibility that companies which have seen a pandemic-induced rise in indebtedness would prefer to use their extra cash to pay back debt. Cash flow uncertainty is another factor that could weigh on the willingness to invest.
The PMI data for September saw diverging trends, between sectors and geographies. The composite PMI has been stable in the US in September after rebounding the month before. In the euro area however, the jump in July was shortlived and after the sharp drop in August, September saw another decline, leaving the PMI just above the 50 threshold...
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.
Declining effectiveness of monetary policy and increased fiscal policy space make the case for increased public debt issuance in combination with quantitative easing to boost growth. There is concern that such policy coordination would lead to fiscal dominance whereby monetary policy is dictated by considerations in terms of public finances to maintain public debt sustainability. Once the pandemic will be behind us, governments will have the responsibility to improve their public finances. Inaction in this respect would put the burden on the ECB when fighting future downturns. It would be a different type of fiscal dominance.
Based on our indicators, uncertainty has declined after the huge jump earlier in the year following the outbreak and spreading of Covid-19. Starting top left and moving clockwise, the media coverage based indicator has declined but remains at a high level, reflecting that the pandemic continues to dominate headlines. Uncertainty based on company surveys has eased in the US whereas in Germany, the improvement is more outspoken. In both cases however, the level remains very high. The geopolitical risk measure has increased recently. The series is quite volatile but one observes a rising trend [...]
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 easing of lockdown measures has caused a significant improvement in business sentiment and a mechanical rebound in activity and demand. In the near term, the narrowing of the gap between observed and normal activity levels should gradually lead to less spectacular growth numbers. These are underpinned by pent-up demand, monetary and fiscal policy support and the possibility for households to use the extra-savings accumulated during the lockdown. A lot will depend however on how uncertainty evolves. The health situation is not under control in certain countries and there are concerns about the risk of a flare-up. Households face income uncertainty due to bleak labour market prospects. Against this background, companies may tune down their investment plans.
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.
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 15 June. It will be updated regularly.
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 [...]
Across time and countries, financial crises and, more broadly, recessions and recoveries, have had much in common. Recessions predominantly impact the demand side whereas the influence on the supply side is more limited. This time is different. The pandemic-induced recession will have a longer lasting influence on the allocation of household expenditures, if not on the level of spending. More than a normal recession, it will also have major repercussions on the supply side, through changes in global value chains, working from home or the disruption of the economics of businesses which are confronted with a forced capacity reduction on social distancing grounds.
Major central banks have stepped up their efforts to attenuate the economic impact of the pandemic, raising the question whether there is a limit to balance sheet expansion. An asset purchase program (QE) can continue for a long time, given the possibility to broaden the investable universe. Quite likely, asset price distortions and concern about the riskiness of the central bank balance sheet will act as the true constraint. For this reason, a central bank could decide to finance the budget deficit directly, considering that this should have a bigger growth impact for a given expansion of the balance sheet. The real challenge under such a strategy is to keep inflation under control once the output gap is closing.
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 20 April. It will be updated regularly.
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.
