Policymakers around the globe are turning to their fiscal armouries to meet the economic challenges that the Coronavirus is, and will be, causing. This is a welcome development and as we have written previously, central banks have all but exhausted what monetary policy can achieve.
President Trump is pushing for a stimulus package that could reportedly be as much as $1.2 trillion and UK Chancellor, Rishi Sunak, has unveiled £330 billion of state loan guarantees, with an additional £20 billion of financial handouts aimed to help businesses cope with the impact of COVID-19. These stimulus packages are looking to offset the short-run economic damage that is likely to be done from social distancing, travel bans and outright quarantines.
However, central banks still have an important role to play in this crisis. It is their role to ensure that the cost of borrowing remains low for the foreseeable future, in order that governments can do whatever is needed to overcome both the social and economic crises.
We have already seen the Federal Reserve reduce interest rates to zero in the US and our own Bank of England has pulled rates down by 0.5%. To supplement this, central banks around the world have already embarked on a fresh round of quantitative easing, buying up assets to reduce borrowing costs further and give support to the underlying economy. The European Central Bank has just announced a programme to buy €750 billion of bonds after an emergency meeting last night.
What we must remember is that this is not a repeat of the global financial crisis of 2008. 12 years ago, the great recession was caused by a collapsing housing sector and a lack of confidence in banks, meaning the risk at hand was a complete failure of the global economy. This time, the sectors that look most vulnerable are travel, tourism and retail, which combined accounts for 10% of the global economy and employ 10% of the global workforce (source: Fidelity Investment Management).
This is more akin to a natural disaster and the right thing to do in the event of an earthquake is to support those most affected by the seismic economic and social upheaval.