Exceptional crisis, exceptional responses

Nothing seems too exaggerated these days while describing the impact of the COVID-19 pandemic on the world economy. Yes, it is true that we might be facing the biggest economic crisis since the Great Depression of the 1930s; yes, it is true that while the nature of the financial crisis of 2008-2009 was easier to define and address, we have now a cumulative crisis on the supply and demand sides; and while in 2008 many countries had a good margin of manoeuvre with respect to their monetary policy, the lingering concern now is about central banks close to running out of ammunition with interest rates already at zero or in negative territory, and with questions about declining returns of quantitative easing (QE) programmes.   

It is now beyond discussion that the US, Europe and Japan are plunging into a recession following in the steps of China, which should see its gross domestic product (GDP) decline by as much as 10 per cent or more for the first quarter of 2020 on a year-on-year basis. However, with the pandemic now under control and activity restarting steadily, China can expect to have its GDP back to neutral or to barely positive territory by the end of the second quarter, while the expectation is for America’s GDP to drop by 25 to 30 per cent in the second quarter with unemployment at around 13 per cent. The eurozone seems set to have its GDP contract by 1.5 to 2 per cent this year. The Japanese economy had already contracted by more than 7 per cent in the last quarter of 2019 and the developments since then have deepened the slump with the negative impact of the pandemic on consumption and exports and now the postponement of the Olympic Games to next year. 

So the global recession we are looking at will be at least as severe as the one of 2008-2009. No less than 80 countries have already requested emergency financial support from the International Monetary Fund (IMF). The positive element in this bleak picture is that, contrary to what we saw during the previous financial crisis, it is not only monetary policy tools which are being activated now but also fiscal policy ones. 

On the monetary front, the US Federal Reserve has launched an unlimited QE programme, buying almost any kind of credit products. It has also brought interest rates down to zero. The European Central Bank  has triggered a Pandemic Emergency Purchase Programme worth €750 billion  ($820 billion) to buy government and corporate bonds and other assets, injecting cash in the economies of the member countries to calm down financial markets, help governments provide funds to companies and households. The ECB has made it clear that it will buy even more assets if needed. The Bank of Japan has been strengthening its QE policy. China’s Reserve Bank  has also  been easing its monetary policy, lowering the reserve ratio for banks to free more credit especially to the private sector and SMEs — the biggest job providers. 

On the fiscal side ,the G7 leaders have at long last come together, committing to do “whatever it takes” to ensure a globally coordinated response to the economic crisis. The Trump administration and Democrats in Congress have agreed on a $2 trillion stimulus package —with the Wall Street registering its best rally since the financial crisis on this news. Germany, the paragon of fiscal austerity, has announced a whole set of measures which, altogether, amount to about 30 per cent of the country’s GDP. France and other European countries are also opening the tap of credits and subsidies and announcing measures such as moratorium on tax and mortgage payments to help companies and households survive the crisis. 

This is, in fact, the key priority: Ensuring that all the economic agents and mechanisms are able to sustain this tsunami so that the economic machine can restart at once as soon as the pandemic is tamed. 

Three conditions need to be met for this objective to be achieved: First, central banks and governments have to ensure that the different kinds of financial support to corporations and households get to the recipients fast and efficiently enough to avoid to the maximum extent an avalanche of bankruptcies and companies closure and to mitigate the impact of the crisis on individuals and their families and on the more vulnerable segments of societies. And this, even at the risk of some companies and people getting an undue benefit from the situation. 

The second condition is that political leaders be able to take and implement forcefully the tough measures needed, and to provide to their people the kind of messages and guidance that will generate — and sustain — the mobilisation of energies, the discipline and the sense of unity in front of this unprecedented threat. In that respect, there is a lot to be said about the performance of President Donald Trump in addressing this crisis and the contradictory messages from the White House as COVID 19 was spreading through the US.

The third condition is to fully understand that a global crisis requires a global response. So far, in too many cases, it has been “everybody for himself” at the international level, with Donald Trump displaying the worst isolationist instincts and shunning any coordination. Many European  leaders have not done much better, not giving any credence to their mantra about the need for “more Europe” as the response to any challenge Europe is facing. 

Exceptional circumstances are sometimes the catalyst for exceptional leaders to emerge; they can also be extremely harsh for those who fail the leadership test.

Let’s hope for the sake of all of us that the majority of decision-makers around the world will find themselves in the first category at the end of this crisis.   


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