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Where Do We Go from Here?

Mar 06, 2020
  • Hua Xin

    PhD, CASS Graduate School
  • Xu Chen

    University of International Business and Economics


Emergency personnel in the US state of Washington prepare to to transport a person from a facility, where several residents contracted the coronavirus infection [File: Stephen Brashear/EPA]

Less than an hour after the G7 finance minister and central bank governors’ teleconference on March 3, the United States Federal Reserve announced a 50 basis point interest rate cut (the Fed target range now stands at 1-1.25 percent) in response to the evolving risk posed by the novel coronavirus, COVID-19. It was the Fed’s first emergency rate cut since the 2008 financial crisis.

U.S. markets rallied briefly before plunging again to shed almost all their daily gain at closing.

Although the Fed delivered a welcomed surprise, the G7 meeting apparently fell short. Facing potential fallout from the coronavirus on global growth, the G7 statement pledged that the world’s biggest economies would “reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks,” and “the G7 finance ministers are ready to take actions, including fiscal measures when appropriate, to aid in the response to the virus and support the economy during this phase.” But it stopped short of committing to concerted rate cuts as the markets had anticipated.

While the G7 members presented a united front in their commitment to provide monetary and fiscal ammunition to tackle the economic implications of the outbreak, the market finds it underwhelming because other central banks seem to be dragging their feet regarding rate cuts.

Even more worrisome is that, as far as the ECB and Japan are concerned, their hands are practically tied because interest rates have long been stuck at rock-bottom levels and in negative territory. Since mid-January when the COVID-19 outbreak escalated substantially, 14 central banks have cut rates, and more are expected in the coming months. Going forward, the markets, while having priced-in the 50 basis point rate cut announced by the Fed, are expecting an additional 25 bp rate cut when the FOMC convenes on March 18.

As of March 3, according to a rough count, there were 91,320 confirmed coronavirus cases globally, with 3,118 deaths. The U.S. has reported 105 cases and 6 deaths.

How China and the U.S., the two biggest economies in the world, cope with the ongoing outbreak will pretty much tip which way things go. Last week, the White House requested $2.5 billion in emergency funding from Congress, in a rather swift response to the public health emergency. Federal and state governments in the U.S. are working on different priorities, with the Fed focusing on immunity research while state and local authorities are focusing on case tracking, prevention and treatment methodologies.

As for China, its tremendous efforts to contain the spread of the epidemic and efficient treatment of patients have been widely applauded by the WHO and countries around the world. In late February, China’s central bank increased re-lending and re-discount schemes by 500 billion yuan ($71.2 billion), to tide small businesses through this rough patch. The re-lending rate for farmers and smaller businesses has also be lowered by 25 bps to 2.5 percent. Earlier in February, the People’s Bank of China launched a 300 billion yuan special re-lending fund scheme for national and local banks in the worst-hit regions, pumped 1.2 trillion yuan into the financial system via reverse repos and cut the interest rate of medium-term lending facility loans by 10 basis points to mitigate the impact on the broader Chinese economy.

Additional tax and fee cuts have been rolled out. Real lending rates are entitled to subsidies, which will bring financing costs below 1.6 percent. As of Feb. 10, 71.85 billion yuan had been earmarked for prevention and control undertakings across China. The labor supply is stable thanks to IT, and virtually enabled recruitment and hiring events, which will help 8.47 million college graduates find jobs. More than 20 million poor job seekers will be able to put their skills to good use and put food on the table. 

Comforting as financial and fiscal means may sound, stark reality will catch up soon unless the outbreak is contained on a global scale. It must be done sooner rather than later.

The fundamental challenge lies in how to mitigate the blows to production, consumption, tourism, transportation and supply chains, but these problems remain unresolved. So the rate cuts may only provide a short-lived respite or placebo to a wobbling economy in the form of easing repayment costs and forestalling a build-up of credit risk.

According to the Wall Street Journal, the outbreak has caused a meat glut in the U.S., as prolonged export quarantine procedures and softened consumption overseas has resulted in a significant rise of cold-storage chicken products by 12 percent over the first month of the year to 957.5 million pounds.

Rate cuts or easing of monetary policies will not provide answers to the most basic economic problems. Fed chairman Jerome Powell said during a news conference that the Fed “[does] not have all the answers, but will provide a boost to the economy.”

 According to output data released for February, the global manufacturing PMI tumbled seven point to 43.5, one of the largest drops on record, though it was mainly driven by the front-loaded drag caused by the coronavirus outbreak in China. Outside of China, by contrast, the global index fell less than a point in the month.

Nevertheless, as the epidemic reaches scale, it will take a heavy toll on manufacturing and global supply chains. In a report released on March 2, the OECD revised the 2020 full year economic growth forecast down from 2.9 to 2.4 percent, having taken into account the repercussions of the COVID-19 outbreak. Also, the World Bank has announced $12 billion in immediate funds and promises more if the emergency pandemic facility is triggered. These are telling signs that the economic aftermath of the COVID-19 outbreak will be extended, albeit temporary in nature.

Where do we go from here? That is the million dollar question dangling before the political and economic heavyweights around the world. After all, we are a community with a shared future now, thanks to exploding expansion of economic links and the flow of goods, services and people.

Globetrotters, jet-setters and homemakers alike are at the mercy of the epidemic. This is a public health emergency that respects no borders, and concerted, collaborative and coordinated global efforts in health and economic policy will be required to pull off a turnaround. 

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