Following last week’s emergency action by central banks, this week saw governments across the world exerting significant efforts to prevent mass corporate failures and unemployment.
But first, there is one important update from the world’s most important central bank, the U.S. Federal Reserve, who on Monday announced that it will buy an unlimited amount of Treasuries and mortgage-backed securities, as well as launching two new facilities that allow it to buy corporate bonds. The Fed also said it will soon announce a programme to lend directly to small businesses.
The severe market shock that we have seen, and are still seeing, has understandably prompted many to draw comparisons with the financial crisis in 2008/09. However, this crisis didn’t originate in financial markets, so there is no playbook for politicians and government officials to turn to.
As forecasts for the severity of the impact from the pandemic continue to worsen, governments around the globe have been rapidly announcing economic stimulus programmes designed to keep the world economy from sinking into a depression. So far, the boldest measures have come from the UK and Denmark, who are offering to guarantee up to 80% and 75% respectively of employee wages (with certain restrictions). UK companies will also get a £30bn tax holiday, with the government suspending value-added tax payments for a quarter. The actions taken by the UK government are unprecedented. In delivering what was in effect his third emergency economic package, the UK Chancellor sent a clear message: they will do whatever it takes.
In the US, efforts to pass a fiscal stimulus bill worth almost $2tn were ongoing at the time of writing. The measures, if passed, would amount to slightly more than 10% of annual GDP and would certainly go some way to providing relief to Americans and the economy. The main features of the stimulus would be loans to small businesses, so they could retain their workers, and direct payments to US households worth $3,000 for a family of four. The package also includes a $500bn fund to rescue large companies and $50bn to support the airlines, many of which are at risk of collapse.
In the Eurozone, we have seen less willingness to write blank cheques that will undoubtedly have enormous fiscal consequences down the line. This is largely down to two factors: the self-imposed fiscal rules and the high debt-to-GDP ratios of some countries in the bloc. Italy, for example, has a debt-GDP ratio of around 125%, so despite it facing the worst economic situation (and being in the worst economic health to begin with), it is somewhat limited in how much additional debt it can take on. As in previous crises, those member states whose finances are already in bad shape will be reliant on ECB measures to steer their economies through the dark days that lie ahead.
Meanwhile, Germany has stepped up to the plate and is willing to use its strong fiscal position to provide unparalleled fiscal measures to mitigate the economic impact from shutting down all but essential businesses. Angela Merkel’s government plans to increase borrowing by up to 150 billion euros in 2020 and pass a 156 billion-euro supplementary budget, as well as establishing a bailout fund for critical industries of about 500 billion euros. The government is also expected to freeze its debt brake rule, which prohibits the country from presenting structural deficits.
Overall, it appears that governments are able and, in some cases, willing to do whatever it takes to try and lessen the impact from what will undoubtedly be a severe economic shock. What we don’t know at this stage is how long it will take to contain the virus that is still spreading exponentially, and what kind of damage that will do to both populations and economies across the globe.
For more information, please contact Andy Scott, Associate Director at Chatham, at email@example.com.