When does policy peak, how much damage has policy done?

Posted by: Paul Donovan

07 Apr 2020
  • Equity markets rallied on hopes of a slower spread of the coronavirus. Austria announced plans to start easing its lockdown from next week. Economists face two forecast uncertainties. 1) When does fear of the virus and associated policy restrictions peak? 2) How much economic damage has policy restrictions done, which may delay the second phase (economic bounce back)?
  • The first question is answered by a mix of epidemiology, psychology and politics. The second question is answered by how ready companies and consumers are to support the economy – but economic data is missing or poor quality. Thus, the polite fiction that markets are always forward looking is replaced by markets trading on sentiment rather than economics for now.
  • The virus has highlighted international tensions. US President Trump partially eased an export ban on medical equipment, following accusations of piracy from Germany. India partially eased an export ban on a malaria drug after threats of retaliation from US President Trump.
  • Euro finance ministers held a conference call to discuss an emergency package. Support during phase one (the demand drop) has largely been agreed, including help with unemployment payments. The disagreement is whether there should be a common response to phase two, involving Euro area bond issuance.

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