Economic Update


Facing a Dilemma on Fighting the Coronavirus

With the coronavirus, officially known as Covid-19, continuing to spread around the world, total confirmed cases globally have reached nearly 89,000 as of 2 March, with Mainland China accounting for the bulk of them. Outside Mainland China, South Korea and Italy are home to the largest outbreaks to date, followed by Iran, Japan, Germany and Singapore. More and more economies are being directly impacted by the virus, resulting in temporary shutdown of businesses and supply chain disruptions.

The ten economies that have recorded the highest number of confirmed cases as of 2 March accounted for a total of 60% of global output in 2019. Stock markets are often identified as one of the early indicators when it comes to reflecting market expectations of future economic performance. As such, while the search for a coronavirus vaccine is ongoing, investors have begun to worry that the negative impacts on corporate profits and economic growth could be larger than previously predicted.

Over the past month, many stock markets have plummeted. Money is being moved to traditional safe-haven assets. The 10-year U.S. Treasury yield dropped to another record low on 2 March while gold has been described as one of the very few things in the world that has “immunity” to the virus.

One question now is whether the global economy can escape from a sharp slowdown or even a recession. Assuming that the virus outbreak in Mainland China peaks in the first quarter of 2020, and the situation elsewhere remains mild and contained, the OECD has predicted that the coronavirus would cut 0.5 percentage point from global GDP growth this year. Accordingly, global growth is projected to slow from 2.9% in 2019 to 2.4% in 2020.

Another question is how policymakers across the world will react in order to spur demand and support the economy. For instance, the U.S. Federal Reserve decided to cut its interest rates by 0.5% at a special meeting on 3 March.

However, there is limited room for other major central banks such as the European Central Bank and the Bank of Japan to ease their monetary policy by cutting interest rates, given their already low or even negative rates. In addition, extra monetary stimulus might not be effective in coping with a virus-triggered economic downturn, where travel restrictions are in place, shops and factories are closed, and people stay at home.

Targeted fiscal measures would be a better tool to help businesses and people currently under financial stress. But such measures normally take a longer time to formulate and implement than untargeted ones. And again, they would be more effective only when the outbreak really subsides.

Before that happens, measures to slow the spread of the virus -- such as working from home, the suspension of sporting and entertainment events, and even the shutdown of cities -- would only serve to offset the overall effect of economic stimulus measures. Accordingly, this presents a classic dilemma for policymakers to handle. As the situation across the world is likely to get worse before it gets better, it may not be wise for them to fire all their bullets in one go.


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