3 minute read
Jim McCormick outlines why we’re at an inflection point in the coronavirus crisis by taking a closer look at the top three highlights from the global central bank policy response.
Coronavirus economic impact: We are at an inflection point
Last week was another difficult one for us all, especially financial markets which saw disruption to funding, credit market dislocation and a surge in the US dollar. Despite this, we are, in our view – at an inflection point. Here’s why.
Coronavirus infection rates turn
In terms of tracking the trend in infections, using logarithmic growth rates is perhaps the best approach – and that’s what we’ve been using. That said, there are the inevitable issues around relative population sizes and divergences in the amount of virus testing. Nevertheless – growth rates are still very illustrative for the overall picture. And it’s better to have something than nothing.
The good news is that infection trends across Asia continue to stabilise, although the rise in “imported” infections in the last week underscore the need to maintain high levels of social distancing.
Italy on the other hand is mixed. The infection trend in the Lombardy region, where coronavirus has hit hardest, looks to be stabilising. But this is not yet clear at the national level. The curves in the rest of Western Europe and the US however, remain very steep. Public and market anxiety should be able to settle once these trends show signs of stabilising.
Public and market anxiety should be able to settle once these trends show signs of stabilising.
Global policy – sizeable, appropriate and flexible
Collectively, March has been one of the most consequential months for policy in at least the past decade, if not longer. A lot of policy measures were announced and there is far too much detail to cover here, but in short: the aggregate policy response has been sizeable, appropriate and is sufficiently flexible to be sized up and down if needed. Below are my top three highlights:
- No more interest rate cuts
The global policy rate is now at zero, a record low. The gross domestic product (GDP)-weighted easing in March was 0.75%. Markets are still pricing a further 0.2% of easing in the next year but we think the rate cutting cycle is now pretty much at an end.
Importantly, it is unlikely this cutting cycle will be reversed anytime soon, irrespective of whether the global economy recovers later this year.
- Highest ever increase to central bank balance sheets
Meanwhile, the collective quantitative easing (QE) announced in the past few weeks will see the central bank bond-buying trend surpass the peak in early 2016. The market impact should be even more dramatic as this new QE follows a prolonged period of quantitative tightening (QT) in 2018-19 see Chart 1.
Chart 1: Thanks to sizeable action from global central banks in response to coronavirus, we expect to see balance sheets reach record highs
- Coronavirus crisis spending = 2008 crisis spending
Perhaps most importantly, the fiscal easing announced over the past week is large, with credible promises to increase it if needed.
- In the US, it was only two weeks ago that the COVID-19 crisis spending was set at $8 billion, which the White House viewed as too large. It is now $1.2 trillion and well designed. The targets are moving (up) in Europe, but the fiscal promises in place are already big.
- In the UK, the fiscal loosening announced already will be nearly as big as the programme in the wake of the 2008 financial crisis.
- We estimate the Euro Area easing from announced measures and cyclical buffers will be at least 3% of GDP.
Combining the US, UK and Euro Area together, we expect the fiscal easing will be more than 6% of GDP, at least as big as the programme during the 2008 crisis.
We expect the fiscal easing will be more than 6% of GDP, at least as big as the programme during the 2008 crisis
This CV-19 policy bazooka will provide support for investors and markets
Although the picture for coronavirus infection rates looks bleak for Western Europe, trends globally have taken a different turn – so let’s try and hold on to that. But the real clincher in this inflection point is the swathes of global policy we’ve seen; indeed last week was perhaps the busiest for policy making since the global financial crisis, if not ever. The bottom line is that combined, all this central bank action should certainly provide support for markets over what it likely to be a bumpy period. And remember, this policy response has been put together far quicker than it was in 2008. That should matter for investors and markets, even if it is just at the margin.
We expect that things will quieten down this week on the policy front, if not stop entirely – at least for the most affected regions in the west. Stay safe and stay tuned for more insights on the coronavirus crisis.