The COVID-19 pandemic has caused a sudden stop in an increasing number of countries. This in turn had led to international spillovers via a decline in foreign trade and an increase in investor risk aversion triggering a global rush for dollar liquidity and a surge in capital outflows from developing economies. A forceful reaction has followed in major economies in terms of monetary and fiscal policy in an effort to attenuate the impact of the pandemic. The near-term dynamics of demand and activity will entirely depend on the length and severity of the lockdown. Once the lockdown has ended, the recovery is likely to be gradual and uneven and policy will have to shift from pandemic relief to growth-boosting measures, thereby putting additional pressure on public finances.
In March, the employment component of the purchasing managers indices for the eurozone declined, whereas in the US, initial jobless claims skyrocketed. Companies need flexibility to manage their cost base but households suffering from an unemployment-related income loss would act as a headwind to the recovery. In the US, the Federal government will top up unemployment benefits, which vary from state to state. In Europe, short-time work schemes allow employers to adapt their workforce without having recourse to costly lay-offs.
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 27 March. It will be updated regularly.
The measures to stop the spreading of the pandemic have a profound impact on the economy which increasingly shows up in the economic data.Record declines in business sentiment illustrate the necessity of the forceful policy measures which have already been taken.The lifting of the lockdowns will, mechanistically, trigger a rebound in activity but additional stimulus will probably be needed to maintain the momentum.
The PMI indices published this week give an early insight into the scale of the economic shock from Covid-19. The composite indices for Japan (35.8), Germany (37.2), France (30.2), the UK (37.1) and the US (40.5) all slumped in March. The euro zone composite PMI was the lowest ever recorded at 31.4. The deterioration was particularly marked for the sub-indices relating to employment and orders for goods and services. Figures for April, whilst remaining at historically low levels, are expected to show increasing divergence between the regions. In East Asia, internal demand should start to pick up, as activity starts to normalise in China. Conversely, the epidemic is spreading more rapidly in the US, India and Africa; meanwhile, many European countries remain in lock-down.
Recent activity and demand data for China show the huge impact of the coronavirus epidemic. German business expectations have seen an unprecedented monthly drop in March . The drop in the price of oil acts as an additional drag on growth and a source of increased credit risk. The strengthening of the dollar is a source of concern for issuers with foreign currency debt in dollar. Despite swift action of the major central banks and the announcement of increasingly important fiscal policy support in various countries, equity markets have barely reacted: lack of visibility dominates.
Wall Street has entered a bear market, having declined more than 20% from its high. Equity markets globally have seen huge declines this week and corporate bond spreads have widened significantly.Despite the positive news from China, the combination of an uninterrupted international propagation of the coronavirus has dealt a blow to expectations about the growth outlook for the next several months. The oil shock has made matters worse.Central banks have reacted. After the Fed rate cut last week, the Bank of England cut rates as well and the ECB also took several measures to support activity.The instrument of choice at the present juncture is fiscal stimulus of a sufficient size. Both in the US and the eurozone, we are still waiting for this impulse.
The coronavirus epidemic represents a combination of a demand, a supply and an uncertainty shock. This has knock-on effects on the price of oil and on financial conditions which in turn should end up acting as an additional drag on growth. The huge drop in the price of oil following the absence of an agreement amongst the OPEC+ countries on further production cuts, makes this worse. It hits the producer countries, increases the financial pressure on energy companies, in particular those which are highly indebted, whereas the reaction on the demand side will be muted due to the epidemic and lack of visibility. The timid improvement of business survey data at the end of 2019 has been stopped. Recent data show a very significant deterioration in China, Hong Kong
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’
The Federal Reserve created a surprise this week by, quite unusually, going for an inter-meeting cut of the federal funds rate of 50 basis points. At first glance, the very nature of an epidemic makes monetary policy ill-equipped to address the consequences. The drop in demand and the disruption of supply are not related to the level of interest rates. Nevertheless, monetary policy has an important role to play in the current environment by seeking to avoid a deterioration of the financial and monetary conditions. This is a defensive move, the alternative being to run the risk that the tightening of these conditions acts as an additional brake on activity. It seems this has played a role in the decision of the FOMC and it now puts the onus on the ECB to act at its meeting next week.
At the start of a new month, the purchasing managers indices are amongst the earliest data providing information on what happened the month before. Following the coronavirus outbreak they were even more eagerly awaited than normal. For the manufacturing sector, the picture is very mixed, with a considerable decline for the world index on the back of huge drops in China and Hong Kong. On the other hand, the index for the eurozone saw another increase, driven by Germany, the Netherlands, Spain and Greece with Italy remaining stable and France weakening. In the US, both the Markit PMI and the ISM index declined. Clearly, except for China and Hong Kong, the data do not yet show the impact of the coronavirus epidemic but it is only a matter of time for this to happen
The international propagation of the coronavirus forces a rethink of the consequences for the global economy. Coming after the outbreak in China, the marginal impact on the global economy of the spreading of the epidemic should, a priori, be rather limited. Yet, financial markets have reacted very negatively. This jump in risk aversion reflects concern that the economic consequences may have been underestimated thus far as well as increased focus on tail risk. This ‘financial accelerator’ phenomenon may in turn contribute to the worsening of the growth outlook.
The data used to chart different measures of uncertainty do not yet take into account the impact of the coronavirus. With this caveat in mind, the signals nevertheless go in different directions...
Putting a number on the consequences of the coronavirus is a huge challenge. On some of the topics we have a satisfactory level of visibility of the order of magnitude: international spillover effects of the demand shock, repercussions of the global increase in uncertainty. The visibility is much lower concerning the effects of the supply disruption. This is even more the case for the impact on China. In the near term, data surprises –the difference between the consensus forecast and the outcome- should be higher than normal. However, provided that the peak of the epidemic is reached quickly, visibility should improve quickly and hence support confidence.
Population ageing creates major challenges for PAYG retirement systems in the OECD countries. Reforms are needed to their sustainability. These reforms have taken two directions: lower benefits or the extension of the retirement age. Based on current regulations, in most countries, benefits will be less generous for future cohorts. In Poland, replacement rates - the percentage of an individual's latest employment income that is replaced by a pension benefit upon retirement - could be more than halved compared to those retiring now. Another possibility is the lengthening of the normal pension age. Countries that have linked the pension age to life expectancy will be able to maintain benefits at a relatively high level
From an economic perspective, the coronavirus epidemic represents a combination of a demand, a supply and an uncertainty shock. The weight of China in world economy, its contribution to global GDP growth and its role in global value chains imply that the international repercussions are more far-reaching than during the SARS crisis in 2003.We have to brace for poor data in February and March, so the real test is whether April sees a pick-up in business surveys. Absence thereof would fuel concerns that the impact is more lasting in nature which would put us in a U-type scenario. An L-type scenario looks unlikely as yet whereas a V-type recovery would supposes a swift decline in new cases.
Recent survey data have picked up, in particular in the manufacturing sector and in terms of export orders. The European Commission noted a marked increase of economic sentiment in the European Union, the eurozone, Germany and France in January, after substantial weakness in Q4. Although economists expect a pick-up in growth in the US as the year progresses, the dispersion is very wide. This means that the median forecast will inspire less confidence than if the level of disagreement amongst forecasters would be lower.
In recent months, the global manufacturing cycle has been bottoming out whereas in services a slight uptick has been noted. In addition, two major sources of uncertainty have seen a positive development: the US and China signed a trade deal and the UK and the European Union can at last start negotiations about their future relationship. Very accommodative central bank policy has contributed to buoyant market sentiment. The combination of these three factors - stabilisation of business sentiment, decline in uncertainty, supportive financial environment - implies conditions are met to see some uptick in growth. Nevertheless, caution prevails in this assessment, if only because later on this year, uncertainty may very well increase again.
The US-China trade deal has brought relief. It avoids new tariff increases by the US with the risk of further escalation. The deal should be welcomed in China, given its ongoing growth slowdown, but also in the US where companies had increasingly expressed their concern about the trade confrontation The rest of the world will monitor closely the extent of trade diversion which could follow from the agreement. Attention will now shift to the phase 2 negotiations, which could very well mean that trade uncertainty will intensify at some stage.
There is a considerable gap between what are considered to be the geopolitical ramifications of the escalating tensions between the US and Iran since the start of the year and the subdued reaction of markets. The market reaction probably reflects the investors’ view that the probability-weighted impact on growth should be very limited because the risk of a major escalation is considered to be small and/or because of an expectation that the impact of higher oil prices on the economy is limited. What also may play a role in the market reaction thus far is that, leaving the geopolitical uncertainty aside, the economic environment is considered to be conducive to taking risk: stabilisation of survey data, reduction in trade-related uncertainty and accommodative monetary policy.
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
2019 has been dominated by uncertainty, in particular about trade tensions and hard Brexit risk, as well as mounting concern about the slowdown of the global economy. his has led to additional policy easing by the ECB whereas the Federal Reserve has reversed course by cutting the federal funds rate on several occasions. This has further reduced the remaining policy leeway of central banks, a subject that will be analysed in the context of the strategic reviews by the Fed and the ECB. It has also led to increased calls for fiscal stimulus. Equity markets have delivered surprisingly strong returns with investors preferring to look at the role of lower interest rates, rather than at the weakening of the profits outlook
We monitor uncertainty by means of different metrics and several have eased as of late. Starting top left and moving clockwise, the economic policy uncertainty index, which is based on media coverage, has declined although it remains at a high level...
Based on business surveys, the cyclical environment, globally, seems to have stabilised. A similar picture emerges for the eurozone and China, whereas in the US it is mixed. Stability’ characterises the monetary policy outlook. After the announcements in September, the ECB can afford to wait before making a judgment of the effectiveness of its policy stance. For the Federal Reserve, it seems that the bar for envisaging a change in the federal funds rate is high, even more so when it’s about considering a rate hike. Stabilisation of economic data and a stable, very accommodative monetary stance provide reasons for being hopeful, but this supposes that uncertainty doesn’t increase again. In this respect, unfortunately, the situation remains very opaque
Certain gases in the atmosphere, such as carbon dioxide (CO2), are largely opaque to the Earth’s infrared radiation and keep heat at the Earth’s surface trapped, like a lid. This is the greenhouse effect, identified in 1824 by French mathematician Joseph Fourier. Its intensity has always varied, but human activity has caused it to disrupt. Since the pre-industrial era – generally accepted as the period from 1850 to 1900 – human activity has caused 2,000 billion tonnes of CO2 to be released into the atmosphere, increasing the Earth’s temperature by 1°C. That increase is now accelerating. It will reach 3-5°C by 2100 if carbon emissions continue at their current trend. Few species can adapt to that rate of change, which is a hundred times faster than during interglacial periods of warming
