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How to revive the global economy: Recession is unlikely, but not impossible DinarDailyUpdates?bg=330099&fg=FFFFFF&anim=1

How to revive the global economy: Recession is unlikely, but not impossible

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How to revive the global economy: Recession is unlikely, but not impossible Empty How to revive the global economy: Recession is unlikely, but not impossible

Post by claud39 Sat Apr 25, 2020 9:21 am

How to revive the global economy: Recession is unlikely, but not impossible


How to revive the global economy: Recession is unlikely, but not impossible 20398

The last week of February witnessed a jolt in the global financial markets, after which the world of finance and business was replaced by the risks of the spread of the Corona virus.

The first week of March also saw the emergence of world policy makers and their work to deal with the situation. The public realization that global GDP is likely to shrink for part of this year, and the risks looming on account of the financial panic and credit crisis, prompted central banks to cut interest rates at a pace we saw last time during the global financial crisis between 2007 and 2009.

On March 3, the US Federal Reserve cut interest rates by 0.5 percentage points, two weeks before the meeting to discuss monetary policy. Central banks in Australia, Canada and Indonesia also cut interest rates. The European Central Bank and the Bank of England are expected to follow the same path. If the financial markets were moving as is well known, further Fed rate cuts would be something that is not unlikely. The composite measure of the global monetary policy rate, published by Morgan Stanley, is expected to drop to 0.73% by June, from the level of 1% at the beginning of the year and 2% at the beginning of 2019 .

However, there is a worrying feeling that a series of interest rate cuts may not be the answer to this contraction. In part, that reflects the feeling that interest rates are already low. The golden rule in dealing with crises is that, to be reliable, you must always have more ammunition available. From 2008 to 2010, the compound global monetary policy rate fell by three percentage points. Today, outside of the United States, interest rates in rich countries are close to zero or minus. Even the US Federal Reserve has limited scope for further cuts. This may be one of the reasons why stock prices failed to recover in the hours after the Fed's last move .

Tension also stems from the peculiarity of the shock in the economy, a shock that has the effects of supply, demand and confidence. The duration of the disorder depends mainly on the severity of the outbreak and the public health measures taken to contain the disease. With these uncertainties, policymakers know that while interest rate cuts are one of the options, they also need financial measures to help companies and individuals with a temporary but painful crisis in terms of tight liquidity.

One of the ways the virus damages the economy is to disrupt the supply of labor, goods and services. The virus has infected people. School closures forced parents to stay home. Blocking orders may lead to the closure of entire premises. This has major implications for demand, some of which may be unavoidable. Patients don't go out very often and buy less goods. Public health measures also restrict economic activity. Giving more money to consumers will do little to make up for this late demand. The activity will only resume when the pandemic wave ends.

There are additional bad repercussions as well. Both companies and families will face a crisis in the availability of liquid funds. If we look at a sample of the thousands of American companies listed on the market: Imagine that their revenues have dried up for three months, but they must continue to pay fixed production costs because they expect a sharp recovery. A quarter of these companies will not have enough liquid cash to overcome this problem, and they will have to borrow or reduce production, and some of them may collapse. Researchers at the Bank for International Settlements, the central bankers ’grouping organization, found that more than 12% of companies in the rich world earn very little income for the purpose of covering their loan interest payments.

Many workers do not have a safety net either. They risk losing their incomes and jobs at the same time as they still have to pay mortgage payments and buy basic commodities. According to a survey by the US Federal Reserve, more than 10% of adult Americans will not be able to meet unexpected expenditures of up to $ 400, which is equivalent to an average value of two days' work. Fearing losing their incomes, people can start piling cash instead of spending, further worsening the companies ’condition .

Modeling the harm caused by all this to economic activity is not an easy task. A survey of purchasing managers in China, a country that has a month ahead of the rest of the world in terms of disease outbreaks, showed that February production fell to its lowest levels since the survey was first launched in 2004. It appears likely that China's GDP will shrink in the first quarter for the first time since Mao Zedong's death in 1976 .

Researchers predict a sharp drop in production elsewhere in the world. Goldman Sachs believes that global GDP will shrink at an annual rate of 2.5% in the first quarter. If we are lucky, the recession will end as soon as the virus stops spreading. But even if that happens, the speed and magnitude of the economic return also depends on how costly side effects are avoided .

This is the reason why central banks and finance ministries have taken more intrusive measures in the economy. These measures fall into three broad categories: policies to ensure a smooth flow of funds through banks and capital markets; measures to help companies bear fixed production costs, such as rental costs and taxes; and measures to protect workers by subsidizing wage costs.

Let's start by ensuring the flow of credit. Central banks and money market regulators have tried to ensure that markets do not freeze, but rather continue to provide funds to those who need them. On March 2, the Bank of Japan made a repurchase of 500 billion yen ($ 4.6 billion) to ensure adequate liquidity in the financial system there. The People's Bank of China has offered credit guarantees of 800 billion yuan ($ 115 billion, or 0.8% of gross domestic product) to banks as long as they will use those guarantees to provide loans to companies severely affected by the spread of the virus. Banks have been asked to work more easily with companies that will be owed their pre-paid loans.

Governments also help companies bear the costs of production, which is the second type of intervention. Singapore plans to execute corporate tax exemptions, rental discounts and business property tax rebates. South Korea will give cash to small companies struggling to pay workers ’wages. Italy will provide tax guarantees to companies that see a 25% decrease in their revenue. In China, the government has asked government institutions that own buildings to cut rents and grant subsidies to building owners from the private sector to follow the same path.

The last group of measures aims to protect workers by preventing layoffs and maintaining income stability. The Chinese government has temporarily reduced deductions from social security contributions. Japan will support the wages of people who are forced to take leave to care for sick children or relatives. Singapore has announced cash grants to employers whose workers have been affected by the virus outbreak.

The announcement of those policies sporadically, and it seems that the issue of implementation and uncertain. As the virus spreads, further rate cuts are expected, but also a systematic use of a more complex set of economic "treatments".

* Professor of Economics at the University of Kansas, USA

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