In just a few weeks the world has changed dramatically. What was initially seen as a virus localised in Asia has spread throughout the world with frightening speed. The shocking destruction that COVID-19 has wrought globally in both health and economic terms will not fade quickly. The virus is destroying complacency in all areas. Total and complete lock down is becoming key to arrest the virus’ ascent, but many have yet to change their ways, believing that they will be ok. How naïve is that!
Governments and central banks are finally coming to grips with the economic and health costs, but also the realisation that even in many developed countries, they are woefully unequipped to deal with the health crisis that is unfolding. Global policy makers and the public at large has gone from a phase of denial, to outright panic and increasingly into fear, which then brings forth the most aggressive responses.
Unfortunately, the lack of global cohesion amongst policy makers has meant that responses have largely been piecemeal and uncoordinated. Two of the biggest super powers, the US and China, have despite a now forgotten about Phase 1 trade deal, become increasingly acrimonious in their dealings with each other. This, at a time when the world is looking for leadership, is proving to be major impediment to dealing with the effects of the virus.
It is not all bad news in term of co-ordination. Central banks globally appear to be acting in unison, even if accidently, in terms of slashing interest rates, aggressively increasing quantitative easing, flushing the financial system with US dollar liquidity and easing some of the regulatory burden on banks. This has helped to improve market functioning, which increasingly appeared to be breaking down over recent weeks. It may not however, prevent further pressure on asset markets given the destruction in economic activity globally.
Unprecedented times call for unprecedented measures. Governments are now stepping up to the plate. Massive fiscal stimulus plans are being ramped up around the world. G7 economies have pledged to do “whatever is necessary” and to co-ordinate actions though much has been un coordinated. US lawmakers are currently deliberating on a stimulus package worth over a $1tn though this could rise significantly in the weeks ahead, Germany is planning to create a EUR 500bn bailout fund, and the UK has announced an “unprecedented” multi billion pound package of measures. These are but a few of the various stimulus measures being undertaken globally.
China has yet to announce a major stimulus package, but has instead opted for more incremental measures as its economy begins to recover following a major lockdown. However, just as China’s supply constraints are easing, demand is weakening sharply as economies globally shut down. The implication is that China’s recovery will not be a quick one either. More stimulus is likely. Recent reports suggest China will step up special bond issuance for infrastructure spending, but more is likely.
Overall, the economic shock is just beginning as the health shock is intensifying. We will need to brace for more pain in the weeks and months ahead. We can only hope that the measures announced so far and yet to be announced alongside with strict adherence to health recommendations will be sufficient to prevent deeper and longer lasting damage. The jury is still out.