Perspectives

Sudden stop to be followed by a gradual, uneven recovery

EcoPerspectives // 2nd quarter 2020  
2
economic-research.bnpparibas.com  
Editorial  
Sudden stop to be followed by a gradual, uneven recovery  
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.  
Sudden stop triggers swift and forceful policy  
reaction  
United Sates: Non Farm Payrolls  
monthly change, x1000  
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.  
600  
400  
200  
0
-
200  
-400  
-
-
600  
800  
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020  
Source: US Bureau of Labor Statistics  
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.  
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  
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