Government and business step up stimulus efforts amid coronavirus crisis
The coronavirus crisis has resulted in huge stimulus efforts from government and central banks.
The coronavirus is an unprecedented crisis for the global economy. While the financial crisis afflicted banks and then spread to the wider economy, the coronavirus has gone straight to the heart of the global economy.
Businesses have closed down ‘for the duration’, consumers aren’t spending and construction has been paused. This ‘full stop’ (or as near as possible) for developed economies requires an emergency response from central banks and governments. So far, these institutions have responded impressively. Emergency rate cuts, a return to full-blown quantitative easing (QE) (in even bigger size than before) and huge stimulus packages from governments show that the scale of the challenge is both appreciated and understood.
All this gives the lie to the idea that the Federal Reserve (Fed) and other central banks were ‘out of ammunition’. Rate cuts were just the start, and full-on purchases of corporate debt and perhaps even stocks seem likely, as the guardians of global finance look for ways to keep liquidity in the system, and provide the vital foundation of confidence which is the lifeblood of any developed economy.
In the UK and Denmark, we have seen governments step in to pay wages for workers affected by the crisis, while in France rents and utility bills have been suspended. In an approach reminiscent of government policy during the two world wars, there has been a ‘shoot first, ask questions later’ policy. No one has enquired how all the borrowing will be paid for, or how companies will repay loans taken from governments during this crisis. At this point, no one really cares.
If no action had been taken, the consequences for global growth would have been too dreadful to contemplate. A mere recession would be considered a lucky escape, with a full-scale depression a possibility. There has to be a global economy to operate in the wake of the crisis, when it eventually subsides. No one wants to think about the consequences of allowing the economy to fail. Thus the stimulus will go on.
Indeed, the stimulus will have to go on. Economies are not light bulbs .They cannot be switched on and off at will. It will take time to get things back to a situation approaching normality; this is why it is good to see the German government looking at fiscal stimulus for the post-virus economy. If the stimulus is switched off too quickly, much of the good work will be undone. The Fed fretted for many years after the financial crisis about when to raise interest rates. Too late, and inflation might get out of control. Too early, and it might choke off the recovery.
Such concerns appear quaint now, when the fate of the world seems to hang in the balance. Instead of slowly returning to a world of ‘normal’ interest rates and no QE, central banks have gone further down the rabbit hole. Meanwhile, even the most capitalist of economies are now either paying workers, or discussing such a move. It will not be easy to go back to the pre-coronavirus world.
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
React to global volatility
Market volatility continues as coronavirus dominates the global agenda. Trade with us to take advantage of:
- Tight spreads – from just 1 point on major indices, and 2.8 on US crude
- Guaranteed stops – they’re free to use, and you’ll only pay a small fee if they’re triggered
- Round-the-clock assistance – our highly skilled teams are available when you need support
Live prices on most popular markets
You might be interested in…
Find out what charges your trades could incur with our transparent fee structure.
Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.
Stay on top of upcoming market-moving events with our customisable economic calendar.