Eco Perspectives

Sudden stop to be followed by a gradual, uneven recovery

04/07/2020
PDF

Sudden stop triggers swift and forceful policy reaction

United Sates: Non Farm Payrolls

The coronavirus pandemic has confronted major parts of the world economy with a sudden stop which is becoming more visible by the day. In the eurozone, several business surveys have seen record drops in March on a monthly basis. In the US, initial unemployment claims have skyrocketed to a degree never seen before and employment has fallen dramatically. The prospect of a big hit to GDP has triggered a swift and forceful policy reaction from central banks. The Federal Reserve has taken the federal funds rate down to zero, embarked on a programme of buying commercial paper as well as high-quality corporate bonds. It has also sent a message saying it would do ‘whatever it takes’ to stabilize the treasury market as well as the market for agencies’ mortgage-backed securities. The ECB has introduced a EUR 750 bn Pandemic Emergency Purchase Programme and given itself the much-needed flexibility of deciding which bonds it would buy. The US administration and Congress have agreed on a fiscal stimulus plan corresponding to 10% of GDP. Several European countries have also taken measures to support households and companies. These measures should attenuate the impact of the crisis and limit the risk that a temporary health crisis ends up inflicting lasting damage to the economy, thereby weighing on the potential to recover swiftly.

Gradual and uneven recovery

The end of lockdowns will lead to a ‘mechanical’ rebound in activity and demand. Pent-up demand and inventory rebuilding are likely to give an additional short-term boost to growth. The key question is what happens to the growth outlook afterwards. The experience in China, in recent weeks, is a reminder that we cannot take a V-shaped recovery for granted, quite the contrary. It will probably be gradual because i/ not all countries move at the same pace towards normality (which will hinder exports, as we have already seen in China today) and ii/ the economic impact of the pandemic differs as well. This impact has a bearing on how fast demand and activity will get back to the pre-pandemic growth path. Several factors suggest that the process will likely be gradual and bumpy. By then, balance sheets of many companies will have deteriorated, causing a preference for deleveraging over increasing capital expenditures. It may even have an impact on hiring plans. These considerations are particularly important for small and mid-sized companies, where many tend to have less-diversified business models, which make them more sensitive to the economic shock. Certain households will adopt a precautionary savings attitude, seeking to re-establish some financial cushion. Lingering health risk concerns may also act as a drag on certain expenditures – e.g. international travel - without necessarily leading to an equivalent increase in other areas. More than anything, household spending will depend on how unemployment develops. In the US, where costs of laying off people are low, Federal Reserve officials expect the unemployment rate to increase significantly. Finally, international trade will probably remain sluggish for months to come, whereby exports from countries where the lockdown has ended up suffering from the drop in import demand from countries which have gone in lockdown at a later stage. Against this background, it is quite likely that fiscal policy, after having provided -- together with monetary policy -- a strong dose of pandemic relief, will need to also provide demand stimulus to ensure that the recovery gathers sufficient pace.

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

United States
State of emergency

State of emergency

The American people and the US economy will no longer be spared the coronavirus pandemic, no more than any other country [...]

Read the article
China
Is the worst over?

Is the worst over?

China’s population and its economy were the first to be struck by the coronavirus epidemic. Activity contracted abruptly during the month of February before rebounding thereafter at a very gradual pace [...]

Read the article
Japan
Recession on the cards despite new fiscal stimulus package

Recession on the cards despite new fiscal stimulus package

The shock of the Covid-19 pandemic comes hard on the heels of a difficult second half of 2019 for the Japanese economy. Like many others, the country is exposed to the economic fallout from this crisis [...]

Read the article
Eurozone
A new, massive shock

A new, massive shock

The Covid-19 pandemic has triggered a recession in the Eurozone that looks likely to be deep but short-lived [...]

Read the article
Germany
Historic stimulus for fighting corona crisis

Historic stimulus for fighting corona crisis

The German economy has come to a standstill because of the almost complete lockdown. To fight the economic consequences, the government launched a massive stimulus plan to increase spending in the health sector, protect jobs and support businesses [...]

Read the article
France
Massive recessionary shock

Massive recessionary shock

Clearly, 2020 will not be another year of slow but resilient growth as we were forecasting just last quarter. We must now expect a massive recessionary shock triggered by the Covid-19 pandemic [...]

Read the article
Italy
At war with the virus

At war with the virus

The outbreak of Covid-19 hit Italy while the economy was already contracting [...]

Read the article
Spain
Badly hit by the Covid-19

Badly hit by the Covid-19

Spain is Europe’s second hardest-hit country by the coronavirus pandemic, and is likely to suffer a sharp economic contraction this year. The economic impact remains hard to quantify [...]

Read the article
Netherlands
Emergency package to protect jobs and businesses

Emergency package to protect jobs and businesses

As the country went into a selected lockdown, business confidence plummeted [...]

Read the article
Belgium
Firm government measures support economy but add to long term fiscal worries

Firm government measures support economy but add to long term fiscal worries

Due to the Covid-19 virus our growth outlook declines by 5 percentage points to -3.5% for the whole of 2020, despite government measures to attenuate the impact of the epidemic [...]

Read the article
Portugal
Caught up by the crisis

Caught up by the crisis

After what proved to be a rather mild slowdown, Portugal’s GDP growth ended up in the upper range of expectations at 2.2% in 2019 [...]

Read the article
United Kingdom
Put to the test

Put to the test

Now a global phenomenon, the Covid-19 pandemic reached the United Kingdom relatively late and did not give rise to immediate protective measures [...]

Read the article
Sweden
Resilient but not off the hook

Resilient but not off the hook

After the economic slowdown was confirmed in 2019, the global shock of the coronavirus pandemic will probably drive Sweden into recession in 2020 [...]

Read the article
Norway
The other shock

The other shock

With the coronavirus epidemic and its impact on oil prices, which are plummeting, the Norwegian economy is heading for a contraction in 2020. Exports, which account for 41% of GDP, are likely to be hit first [...]

Read the article
Denmark
Not spared

Not spared

The Coronavirus epidemic is also sweeping Denmark, which has now introduced relatively strict lockdown measures. With its very open economy (exports account for more than 50% of GDP), GDP growth will contract in 2020 [...]

Read the article
Finland
Entering recession

Entering recession

Economic activity will plummet under the impact of the Covid-19 pandemic, but not only via the export channel. The recession could become more virulent if household consumption and production channels were also to freeze up [...]

Read the article