CFDs are complex instruments. You can lose your money rapidly due to leverage. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money. CFDs are complex instruments. You can lose your money rapidly due to leverage. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money.

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.

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