Coronavirus economic impact: The global policy bazooka is in place

23 March 2020

Jim McCormickGlobal Head of Desk Strategy

Other insights

View more insights

3 minute read

Jim McCormick outlines why we’re at an inflection point in the coronavirus crisis by taking a closer look at the top three highlights from the global central bank policy response. 

Coronavirus economic impact: We are at an inflection point

Last week was another difficult one for us all, especially financial markets which saw disruption to funding, credit market dislocation and a surge in the US dollar. Despite this, we are, in our view – at an inflection point. Here’s why.

Coronavirus infection rates turn

In terms of tracking the trend in infections, using logarithmic growth rates is perhaps the best approach – and that’s what we’ve been using. That said, there are the inevitable issues around relative population sizes and divergences in the amount of virus testing. Nevertheless – growth rates are still very illustrative for the overall picture. And it’s better to have something than nothing.

Asia stabilisation

The good news is that infection trends across Asia continue to stabilise, although the rise in “imported” infections in the last week underscore the need to maintain high levels of social distancing.

Western Europe

Italy on the other hand is mixed. The infection trend in the Lombardy region, where coronavirus has hit hardest, looks to be stabilising. But this is not yet clear at the national level. The curves in the rest of Western Europe and the US however, remain very steep. Public and market anxiety should be able to settle once these trends show signs of stabilising.

Public and market anxiety should be able to settle once these trends show signs of stabilising.

Global policy – sizeable, appropriate and flexible

Collectively, March has been one of the most consequential months for policy in at least the past decade, if not longer. A lot of policy measures were announced and there is far too much detail to cover here, but in short: the aggregate policy response has been sizeable, appropriate and is sufficiently flexible to be sized up and down if needed.  Below are my top three highlights:

  1. No more interest rate cuts

The global policy rate is now at zero, a record low. The gross domestic product (GDP)-weighted easing in March was 0.75%. Markets are still pricing a further 0.2% of easing in the next year but we think the rate cutting cycle is now pretty much at an end.

Importantly, it is unlikely this cutting cycle will be reversed anytime soon, irrespective of whether the global economy recovers later this year.

  1. Highest ever increase to central bank balance sheets

Meanwhile, the collective quantitative easing (QE) announced in the past few weeks will see the central bank bond-buying trend surpass the peak in early 2016. The market impact should be even more dramatic as this new QE follows a prolonged period of quantitative tightening (QT) in 2018-19 see Chart 1.

Chart 1: Thanks to sizeable action from global central banks in response to coronavirus, we expect to see balance sheets reach record highs

  1. Coronavirus crisis spending = 2008 crisis spending

Perhaps most importantly, the fiscal easing announced over the past week is large, with credible promises to increase it if needed.

  • In the US, it was only two weeks ago that the COVID-19 crisis spending was set at $8 billion, which the White House viewed as too large. It is now $1.2 trillion and well designed. The targets are moving (up) in Europe, but the fiscal promises in place are already big.
  • In the UK, the fiscal loosening announced already will be nearly as big as the programme in the wake of the 2008 financial crisis.
  • We estimate the Euro Area easing from announced measures and cyclical buffers will be at least 3% of GDP.

Combining the US, UK and Euro Area together, we expect the fiscal easing will be more than 6% of GDP, at least as big as the programme during the 2008 crisis. 

We expect the fiscal easing will be more than 6% of GDP, at least as big as the programme during the 2008 crisis

This CV-19 policy bazooka will provide support for investors and markets

Although the picture for coronavirus infection rates looks bleak for Western Europe, trends globally have taken a different turn – so let’s try and hold on to that. But the real clincher in this inflection point is the swathes of global policy we’ve seen; indeed last week was perhaps the busiest for policy making since the global financial crisis, if not ever. The bottom line is that combined, all this central bank action should certainly provide support for markets over what it likely to be a bumpy period. And remember, this policy response has been put together far quicker than it was in 2008. That should matter for investors and markets, even if it is just at the margin.

We expect that things will quieten down this week on the policy front, if not stop entirely – at least for the most affected regions in the west. Stay safe and stay tuned for more insights on the coronavirus crisis.

Coronavirus
Interest Rates
Global Markets
Central Banks
US
Europe
UK
Asia
Covid-19
Policy


This document has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this document has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this document, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this document. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this document and any issues that are of concern to you.

This document does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2020 © NatWest Markets Plc. All rights reserved.