Whatever it takes
Government and central banks across the world have pledged to do whatever it takes to stem the outbreak of Covid-19 and to support their economies. Here we look at what that means across 15 economies.
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Fiscal rules out the window
This economic shock is unlike any we have ever seen. Whilst many try to draw parallels, previous downturns can offer limited guidance.
Below we look at 15 different economies and their level of direct fiscal pledges as of 1st April 2020. On average these nations have committed to spending 4.3% of GDP, ranging from around 0.1% in Japan (although a ¥60 trillion, 11% GDP, package has been proposed) to 11% in Singapore.
Last week The Economist wrote that even by the most conservative measure, the global stimulus from government spending in 2020 will exceed 2% of global GDP. That’s much larger than the roughly 1.5% in wake of the Global Financial Crisis (GFC).
Unprecedented levels
The estimated fiscal spend, and corresponding proportion of GDP, across 15 economies
With around a third of the global population currently experiencing some form of lockdown, economic activity has ground to a halt in many markets, with businesses forced into temporary closures. Governments have acted decisively and implemented large scale stimulus to support both business and households. Countries including the US and Singapore are providing direct payments to citizens, up to $1,200 per person in the US (with additional for children) and S$900 in Singapore, both depending on income levels. Others are helping reducing financial burdens through mortgage holidays and rental freezes for those in need.
The largest and potentially longest hit to the economy could come from bankruptcies and subsequent unemployment. As a result, governments across the world are doing whatever they can to protect businesses and jobs. The Economist noted that, in normal economic times across OECD countries each year, roughly 8% of business go bankrupt and 10% of population lose jobs – they are trying to stem this completely.
All nations we’ve analysed offer some form of loan/grant/tax breaks for business, particularly small and medium-sized enterprises (SMEs) and those hardest hit in the aviation, hospitality and tourism sectors. Australia has pledged AU$24.3 billion in small business loans, Germany is offering €50 billion in grants to small business owners and self-employed persons severely affected, in addition to interest-free tax deferrals until year-end. In Dubai, the government announced AED 1.5 billion in measures to reduce government fees, provide additional water and electricity subsidies, and simplify business procedures.
Often, the swiftest economic recoveries are led by consumer spending, therefore protecting jobs is essential. Measures introduced range from direct subsidies, such as in the UK where the government will cover 80% of the salary of furloughed employees, to a maximum of £2,500 per employee per month for three months, to incentives, which includes the US policy of forgiving small business loans if they retain their employees.
These measure have caused some optimism among economists and forecasters. As we noted in last week’s blog, economists now expect the UK unemployment rate to hold between 4% and 6%, only a moderate rise from the 3.9% recorded in December 2019. However, this may be overly optimistic as the latest new claims for Universal Credit, released 1st April, suggest that the unemployment rate could jump to around 5.5% in April.
In Australia, Goldman Sachs chief economist Andrew Boak believes the stimulus will keep unemployment under 8.5%, up from the 5.1% recorded in February 2020. The US’ measures, signed into law on the 27th March, seek to stem a tide of unemployment after record levels of new jobless claims. Data released this week showed that, for the week ended March 27, there were 6.6 million, doubling the 3.3 million seen the week before and 10 times the 665,000 seen at the peak of the GFC.
Measures taken
At a glance, some of the fiscal measures introduced to support the economy
Monetary ‘bazooka’
Not only are governments firing on all cylinders, they are coordinating action with central banks in ways not seen before to provide a boost. Rates have fallen across the globe. Of the 98 central banks covered by Central Bank News , 67 have cut, 27 have held and only four have risen rates (Denmark whose rate is -0.6%, Kazakhstan, Kyrgyzstan and Tajikistan), see a selection in the table below.
As rates were already near low levels in many markets, central banks are also injecting unparalleled levels of cash into global markets. The Federal Reserve, after slashing rates by 1.5% this year, has said that it will put an ‘unlimited’ amount into the system and broadened US dollar swap lines to more central banks. The European Central Bank will provide €120 billion in additional asset purchases and an additional €750 billion asset purchase programme of private and public sector securities – on top of individual Eurozone countries expanding credit lines, such as Germany’s €822 billion (24% of GDP).
Tumbling rates
A look at the benchmark interest rate as at 31st March compared to the beginning of the year
Whilst the hope is for a swift ‘V’ shaped recovery this is unlikely to be the case. Given the slowdown in activity, and the likelihood that containment measures are to remain in place for months, there will be a gradual return to growth. There is universal support for strict lockdowns which will lead to a temporary sharp contraction to stave off a longer and deeper recession.
In a new survey of dozens of economists by the University of Chicago, 100% acknowledged that abandoning severe lockdowns at a time when the likelihood of a resurgence in infections remains high will lead to greater total economic damage than sustaining the lockdowns to eliminate the resurgence risk.
As we have previously discussed evidence from China is pointing to a slow return to normality as measures lift and activity resumes, but there was no immediate bounce back. There are more bright spots on the horizon with China's official purchasing managers’ index rising to 52.0 this month, up from a record low of 35.7 in February, any level above 50 signals improving conditions. Economies that have contained the virus through social distancing, rather than full scale lockdowns, may fare better as they maintained some level of economic activity.
With this unprecedented level of support from governments and central banks, 52% of analysts surveyed by Oxford Economics are hoping for a short ‘U’ shaped recession.