Fanning fear

Posted by: Paul Donovan

12 Mar 2020
  • US President Trump spoke on the coronavirus. Equity markets are falling. Economists stress correlation does not have to mean causation. Correlation can mean causation, however. Markets are upset because 1) there are few policies to limit the near-term economic damage; 2) President Trump got several policies wrong, raising questions about policy coherence; and 3) characterising this as a foreign virus suggests an unrealistic assessment of the risks.
  • Italy is closing all shops except food stores, pharmacies, banks, and (for no doubt the best of reasons) tobacconists. Other businesses remain open. This affects Italian domestic demand. It has less impact on Italian supply to the global economy (which is less significant than Chinese supply was).
  • The ECB meets. Taking rates more negative (i.e. increasing taxes on banks and savers) does little to help. Targeted help focusing on getting companies through a demand shock is important. The UK did this yesterday with fiscal and central bank help to small businesses (the UK rate cut was almost incidental).
  • Although China's domestic economy is recovering, the global situation challenges external demand. This means China's shutdown does less supply chain damage (because there is less demand). It emphasizes that this is more a disinflationary demand shock than it is a supply shock.

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