Global Fiscal Policy: Whatever It Takes

25 March 2020

In recent weeks, policymakers world-wide have repeatedly pledged “to do whatever it takes” to offset the economic damage wreaked by the Covid-19 outbreak. In general, the aim has been to provide needed medical resources, allocate compensation for sick leave, provide direct payments to workers losing their jobs, and to give support to businesses (particularly in the hard-hit sectors such as airlines, hospitality, and retail). These efforts seek to prevent what hopefully will be a temporary demand/supply shock from having permanent ramifications.

In passing its $2 trillion fiscal stimulus package, the United States has now joined other nations in honouring this pledge (the photo above suggests that Messrs Trump and Mnuchin are not practicing social distancing). This is welcome news. The Chart below illustrates the planned fiscal stimulus exceeds that implemented following the Global Financial Crisis (GFC), and is amongst the world’s largest.

The USA is not alone, of course. The Chart above illustrates that many countries have announced significant budgetary support. Europe is now the epicentre of the pandemic. The Chart below illustrates that following years of austerity, many European nations have scope for considerable fiscal stimulus. Finally, Germany looks set to lead the way: proposing nearly Euro400 billion in support (the figures in Chart 1 do not include the impact of loan guarantees which are very sizeable in many countries).

Other European countries are following suit. Impressive measures have been announced in the United Kingom, the Netherlands, Sweden, amongst others. I expect additional action in Europe in coming weeks. Programs in hard-hit France, Italy, and Spain, however, are small by comparison. Perhaps these nations feel constrained by high debt levels, which have continued to rise since the GFC. With interest rates low, these countries will need to get over such reluctance during this emergency. Indeed, the USA has not felt such an impediment, despite its ballooning debt burden. Ideally, the European Union should establish programs to assist fiscally contrained nations, especially where the Covid-19’s impact has been most severe.

Emerging Markets: Joining In, But China Delays

Numerous Emerging Market countries are preparing supplementary budgets. However, there are important distinctions to make. Low debt levels in Asia provide scope for action. Korea, Malysia, Singapore, Thailand and India have announced programs amounting to 1% of GDP, as has Mexico. Meanwhile, even though Brazil’s public finances are fragile, additional spending totalling over 2% of GDP is in the pipeline.

China has been surprisingly cautious, despite signs of a sharp economic slowdown: indeed, GDP will likely contract in Q1 2020 (Chart above). For example, the PBOC has only reduced interest rates 10bp, as other central banks have slashed borrowing costs. Following the GFC, China’s fiscal and monetary stimulus limited the slump in both the local and world-wide economy. Perhaps China’s role as the global engine of growth is constrained by its now higher level of debt. Nevertheless, an infrastructure program worth 3% of GDP is being discussed. China will be under international pressure to deliver soon.

Strategic Implications

  • Global fiscal authourities are rightly not being impeded from acting, despite high debt levels. At some point, the financial costs will be addressed, but now is the time to save lives.
  • Financial markets should be encouraged that policymakers are living up to their pledge to do whatever it takes. I do expect additional fiscal measures in Europe and Asia in coming weeks. These programs increase the likelihood that the economic impact of the pandemic will prove temporary.
  • However, financial market and economic recovery can not be assured until the pandemic is constrained and a vaccine developed. This will not happen by Easter. Think autumn. China and Korea have almost capped confirmed cases, at least for now. As China eases its restrictions will the virus spread again? That will be an important lesson for other countries. Europe is still the epicentre, but the Chart above raises some hope that confirmed cases may be nearing a peak in Italy at last. I fear the lack of testing will make the USA the next centre of the crisis, raising both public health and economic risks. I hope I am wrong.

Stay healthy!