Don't stimulate a virus. Defend against it

Posted by: Paul Donovan

16 Mar 2020
  • The Federal Reserve announced a series of measures on Sunday (cancelling the March FOMC meeting). There are policies to help banks support small businesses. Quantitative policy easing has restarted on a large scale to help support fixed income markets. There was also a rate cut.
  • There is no point trying to stimulate an economy when health policy makers want people to stay home. Central banks need to ensure that the demand shock does not cause good companies to fail. If that happened, there would be a second demand shock (as people lose jobs), which would continue after fear of the virus has peaked.
  • The US House of Representatives has passed some fiscal measures. Some workers (not all) will receive paid sick pay, with companies receiving tax breaks. There is more money for food stamps. It is hard to quantify, but these measures may amount to 0.5% of GDP. More will probably be required.
  • China's industrial production and retail sales data for January was very weak. This shows the severity of the quarantine measures. The evidence is that China's economic rebound has begun. However, the international demand shock of fear of the virus will be a drag on Chinese growth.

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