Last week’s post discussed the Federal Reserve’s response to the COVID-19 outbreak and considered its possible path forward. Since then, we have seen a monetary response elsewhere. Fellow G7 central banks in Canada and the UK followed the US lead and cut by 50 basis points. The Bank of England also announced cheap funding to encourage bank lending, as well as a reduction in the cyclical component of banks’ capital requirement ratio. As mentioned last week, there remains some uncertainty about the correct way for monetary authorities to respond to the fallout from COVID-19 given that it is likely to negatively affect both demand and supply. However, for the moment, policymakers appear to believe that the former will dominate.
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The new UK chancellor, Rishi Sunak, delivered the government’s Budget this week, perhaps shedding light on possible fiscal responses to come in other affected economies. Mr Sunak announced a £12 billion spending plan to respond to what the World Health Organization now deems to be a global pandemic. The funds will provide support to affected businesses and ensure that all employees forced into self-isolation will receive sick pay over that period. The chancellor announced additional spending measures worth £18 billion in order to boost economic activity against a backdrop of record low interest rates. The combined monetary and fiscal response together will loosen the UK’s policy stance significantly, perhaps boosting economic growth by 1% this year. It would not be a surprise to see other affected countries follow suit.
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At the time of writing, the US had earmarked $8 billion to respond the crisis. The UK’s £12 billion in direct COVID-19-related funding would be equivalent to almost $120 billion once you factor in the relative size of each economy. Ireland, meanwhile, has announced a €3 billion package to respond to COVID-19. Adjusted for the size of its economy, that package would be equivalent to almost $200 billion in the US. That is just for direct measures related to COVID-19 — a broader counter-cyclical fiscal stimulus could be bigger still. The Dow Jones Industrial Average entered bear market territory this week, dropping 20% from recent highs in volatile trading subject to extreme uncertainty. Any sustained rebound may depend on a forceful response coordination across government. It is unclear exactly how much the US economy will need. But international experience so far suggests that it will be significantly more than the $8 billion that has been penciled in so far.
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