Get used to it: Plunging economic activity indicators will be the main headline-grabbers for weeks to come. Atypically, China was the initial source for this shock-talk as its abrupt COVID-19 lockdown wreaked havoc on its economy, and its vast global supply chain. It has now arrived on our shores in the worst way. Millions are being added to the rolls of the unemployed in the West and with a sudden surge that’s unprecedented. Analysts are sharpening their pencils and forecasting economic carnage in the second quarter. Annual forecasts have dropped like a stone and as data points come in, predictions may well fall further. Panic about economic collapse has ignited government action globally, producing a torrent of policy announcements aimed at offsetting decline. Will they succeed?
If they do, it’s going to take a lot. Lockdown has arrested a vast chunk of global economic activity, easily a soft first-quarter performance and a deep, double-digit decline in the second quarter of this year. The speed of decline means there’s been no time to prepare; everyone was caught unawares, and both businesses and consumers are looking for help.
For those who remember 2009, it’s now like Yogi Berra’s “déjà vu all over again.” Monetary policy was first out of the gate, with the U.S. Federal Reserve setting a landspeed record for hitting the zero lower bound and others who could, following suit. This, together with renewed and significant quantitative easing measures, are essential injections of liquidity to ensure that normal financial flows continue.
Announcements of ever greater “shock-and-awe” public spending measures have rendered forecasts obsolete on almost a daily basis. These are adding up to massive amounts as a share of gross domestic product (GDP). Back in 2009-2010, America’s spending package was estimated to be anywhere between 2% and 5% of GDP; today’s plans are estimated at twice that much. Australia is next in line, with stimulus worth 9.7% of GDP. Other countries have packages on the scale of Great Recession measures, with Germany’s stimulus at 4.5% of GDP and Canada’s at 3.6%. All estimates of COVID-19 measures are a moving target and subject to change on a moment’s notice.
Size is one thing; effectiveness is another. Back in 2009, fiscal stimulus money was directed largely at infrastructure investment activities, and there was heavy emphasis on “shovel-ready” projects. That’s because governments wanted to cut down the normal lag between authorizing money and getting it out into the market. This time around, the composition of measures is quite different. The IMF Policy Tracker shows clearly that in a number of countries, there is a strong emphasis on personal income support programs, in addition to regular unemployment insurance programs; and these are clearly shifting into high gear. Getting support to business is also a top priority.
When it comes to announced stimulus programs, it’s hard to over-emphasize the need for speed. The instant drop in activity has created immediate cash flow problems for millions of laid-off workers, many of whom have no more than one or two months of financial breathing room. And it has created critical cash flow issues that are no respecter of the size, sector or spread of anyone’s business activities. In many cases, cash is essential to ensuring that there will be businesses for laid-off workers to go back to when the effects of COVID-19 start to dissipate.
There’s rising anxiety that a return to normal won’t happen. It’s a natural response, but that’s a key respect in which today is very different from 2008. Economic bubbles that were obvious then aren’t today’s story; fundamental strengths that preceded the virus are the planet’s greatest hope for a speedy rebound.
Unfortunately, public finances weren’t one of those key strengths. Sluggish economic performance since the Great Recession prevented a payback to the public purse, and most nations brought far poorer fiscal positions to this crisis. In the eyes of most, that’s tomorrow’s problem; the more immediate need is surviving the next few months. Canada is fortunate to have a much stronger starting position than most; efforts by various past governments to balance our books ensure that we’ve got much more fiscal room than most, relatively speaking.
