Opening up about fear

Posted by: Paul Donovan

27 Apr 2020

Daily update

  • European governments are detailing how their economies will reopen from lockdown. The Trump Twitter feed has signalled support for reopening. The risk is fear. Fear of the virus has always been the main source of economic damage. If reopening is too early, or people believe it is too early, fear of the virus could do more economic damage.
  • The Trump Twitter feed also talked about pent-up demand. This may support the phase two bounce back – although it may be stronger in Europe than the US. Pensioners, people working normally, people working from home, and people on European furlough receive normal or near normal income. Spending is down. That means enforced savings. Those savings could support the bounce back—if fear is contained.
  • The Bank of Japan met today, pledged to keep pumping in liquidity and discretely dropped references to inflation from its statement. The US Federal Reserve, Swedish Riksbank and ECB all meet this week.
  • There is a limit to what central banks can do. Economic downturns are normally caused by imbalances, and central banks help to resolve those imbalances. This is not the case today. The downturn is policy driven, and central bank policy plays a very junior role to fiscal policy.

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