The impact of the coronavirus pandemic or COVID-19 on the global economy has unnerved investors globally. The fear of an economic slowdown has resulted in markets tumbling, as well as oil and gold sliding. As nations across the world combat COVID-19, the central banks and governments have begun to roll out initiatives in an effort to calm the market tumult amid the coronavirus meltdown.
Here’s a quick look at some efforts being put by the major economies.
The U.S. stock markets shifted into bear-market territory, plunging more than 20% from recent highs on concerns about the COVID-19 epidemic. The market fall on Thursday is being said to be the worst since 1987 as it ended the 11-year-long bull run in the markets. While estimates have started to emerge, there is still uncertainty about its severity and impact on the U.S. and global economy.
Amid this pessimism, the U.S. government bond yields have cascaded to record lows. To address liquidity issues in the market and fears of a global recession, the Federal Reserve announced some measures to provide some relief in the present situation, which includes injecting $1.5 trillion into the financial system. The statement by Federal Reserve Bank of New York read, “These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.”
This was preceded by the cut in the federal-funds target rate by 50 basis points by the Federal Reserve to maintain a target range of 1% – 1.25%. The Trump administration has declared a national emergency, which “frees up as much as $50 billion in financial resources to assist Americans affected by the outbreak.” The United States, the world’s largest economy with a nominal GDP of $21.44 trillion, constitutes one-fourth of the world economy. In January, IMF estimated the U.S. GDP at 2% in 2020 and decline to 1.7% in 2021. These estimates will take a hit but to what extent that will only become clear as the situation unfolds.
In Australia, the government announced a $17.6 billion economic plan to ensure that the economy is ready to face the challenges posed by the spread of the coronavirus. The targeted stimulus package is “focused on keeping Australians in jobs and helping small- and medium-sized businesses to stay in business.” According to the report, the plan directly supports 6.5 million individuals and 3.5 million businesses. Australia is a $1.38 trillion economy, which was projected to grow at 2.3% by the IMF earlier this year. However, the IMF recently noted that “downside risks to the near-term economic outlook remain elevated and have recently increased amid the coronavirus outbreak.”
China, the second-largest economy in the world, has been the epicenter of COVID-19. Back in 2003, during SARS outbreak, China only accounted for 4.2% of the global economy compared to 16.38% now. During 2019, China accounted for 39% of the global expansion and this explains the fears related to negative repercussions of a slowdown in China on the global economy
Given the magnitude of the problem, the Chinese government was quick to respond to the situation in the country and deployed all efforts on stopping the spread of the disease. In early February, the People’s Bank of China (PBOC) injected $174 billion (CNY 1.2 trillion) into money markets through reverse bond repurchase agreements. The bank is expected to announce a targeted reserve requirement ratio cut sometime soon.
While there are different assessments of the situation, an estimate by Morningstar has kept its long-term China GDP forecast unchanged while lowering its 2020 China GDP forecast by 250 basis points. The report says that “we expect catch-up growth in following years.” The first quarter GDP is expected to reflect the impact of declines in retail sales, investment and industrial output due to the shutdowns during January and February. In end of February, based on the scenario then, IMF projected that 2020 growth for China would be 5.6%, 0.4 percentage points lower than the January estimates.
The government of Indonesia has prepared a $8 billion stimulus package to provide support to its economy, as the spread of coronavirus disrupts global activities. Indonesia is the largest economy in Southeast Asia and among the fastest growing trillion-dollar economies in the world. The government is making all efforts to contain the damage caused by COVID-19 given that its economy is already combating continued weakness in exports and its impact on domestic demand.
Indonesia has announced measures such as buying back government bonds and halting income tax on manufacturing companies, including exemptions from personal income tax for manufacturing works for a period of six months. Last week, the country’s apex bank announced a 0.25% cut on its key policy rate to 4.75%, and lowered the FX reserve requirements for commercial banks from 8% to 4%. This move would increase FX liquidity in the banking industry by around $3.2 billion while alleviating foreign exchange market pressures. The country’s central bank is expected to announce a revised growth outlook soon.
There are also announcements by the Bank of England for cut in interest rates while Taiwan has unveiled a stimulus package. India’s Finance Minister has said that the situation is being monitored closely and adequate measures will be taken as and when required. The World Bank stepped in early March and made available an initial package of up to $12 billion in immediate support to assist countries coping with the health and economic impacts of the global outbreak. The IMF has come in support of vulnerable countries with different lending facilities, “including through rapid-disbursing emergency financing, which could amount up to $50 billion for low-income and emerging markets.”
While efforts are being made to provide support, the uncertainty factor is playing havoc. It’s a challenging time for the world in general, not just on the economic front. As the coronavirus subsides, and life goes back to normal, the economic confidence will return, and recovery will follow.
Disclaimer: The report has been carefully prepared, and any exclusions or errors in reporting are unintentional.
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