EcoWeek

Faced with a sudden stop, policy switches to a ‘whatever it takes’ mode

Eco week 20-11// 20 March 2020  
economic-research.bnpparibas.com  
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EDITORIAL  
FACED WITH A SUDDEN STOP, POLICY SWITCHES TO A ‘WHATEVER IT TAKES’ MODE  
Recent activity and demand data for China show the huge impact of the coronavirus epidemic. German business ex-  
pectations 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.  
Sudden stop. Until recently, the words referred to a sudden halt in This allows for fluctuations in the distribution of purchase flows over  
1
private capital flows to emerging economies. Following the epidemic, time, across asset classes and among jurisdictions” . It couldn’t be  
they now also apply to demand and activity, witness the unprecedented clearer.  
1
1-point drop in business expectations in the ifo survey for Germany. The  
William De Vijlder  
latest data from China provide another illustration: over the January-  
February period industrial production dropped 13.5% versus last year,  
real retail sales declined 23.5% and fixed asset investment was down  
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4.5%. In case this would still be necessary, this is a reminder of the  
BUSINESS CLIMATE (IFO, GERMANY) AND FINANCIAL MARKETS  
quasi-impossibility of assessing the extent of the hit to growth which  
results from what is, after all, an exogenous, non-economic shock. This  
explains why, despite massive, swift action of the major central banks  
and the announcement of increasingly important fiscal policy support  
in various countries, equity markets have barely reacted. At most, these  
actions significantly slowed the speed of decline.  
Business expectations*(lhs)  
Monthly change in % (rhs)  
Index, 2015 = 100, seasonally adjusted  
110  
10  
5
1
05  
00  
1
The big additional drop this week in oil prices is making matters worse.  
Lower oil prices entail a transfer of spending power from producers to  
consumers, so the former spend less and the latter more. However,  
today, demand is in no position to react to any significant degree due to  
lockdowns and bans on international travel. It implies that the negative  
effect dominates by far: pressure on budgets of oil exporting countries,  
increasing default risk of certain highly-levered oil companies in the  
US. Given their weight in the index, this in turn can create a contagion  
effect within the high yield market as investors decide to reduce their  
exposure to the asset class.  
0
9
9
8
5
0
5
-
-
5
10  
80  
75  
-15  
2020  
1
992  
1996  
2000  
2004  
2008  
2012  
2016  
*
Manufacturing, Trade, and Construction  
Eurostoxx50  
SP500  
Index, 31/12/2019 = 100  
1
1
1
10  
05  
00  
Finally, the recent, across the board, strengthening of the dollar is  
complicating matters for the corporate sector in developing economies  
given their USD debt load. Not only are they faced with a drop in their  
exports to the advanced economies, but the dollar appreciation puts  
pressure on their credit quality.  
9
9
8
5
0
5
The policy reaction has been swift and impressive. The Federal Reserve  
has taken the federal funds rate down to zero, restarted QE and em-  
barked on a programme of buying corporate paper. The ECB has intro-  
duced a EUR 750 bn Pandemic Emergency Purchase Programme which  
will run until the end of the year. The US administration and Congress  
are preparing a USD 1.3 tn (6.5% of GDP) stimulus package. Several  
European countries have also taken measures to support households  
and companies. For the eurozone, most important of all is the flexibility  
which the ECB is now demonstrating. Quoting its President “while the  
benchmark allocation across jurisdictions will continue to be key to the  
capital contributions of the national central banks, purchases will be  
conducted in a flexible manner.  
80  
7
7
6
6
5
0
5
0
data until 17 March  
Jan 20  
Feb 20  
Mar 20  
SOURCE: IFO, DATASTREAM, BNP PARIBAS  
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. Opinion piece of ECB President Lagarde in the Financial Times, 19 March 2020.  
The spreading of the coronavirus epidemic triggers a feeling of a ‘sudden  
stop’ for the world economy but massive monetary and fiscal policy action  
should mitigate the impact.  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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