Big variance in predictions about the virus and its economic impact. For The Economist “..25-70% of the population of any infected country may catch the disease...Across the world, the death toll could be in the millions.”… we could have a global recession. /1
There are milder forecasts, depending on (difficult) containment success by the 60±. countries already infected. For the economy, the supply and demand shocks are quickly conflating. Supply-side policies to help preserve vital supply-chains and demand stimulus are necessary/2
A few days ago I asked: Would rate cuts by some basis points produce visible results? Is a “gesture” unavoidable in the game with financial markets? Or is it more important the “game” with Treasuries for a bit of necessary fiscal policy? It´s certainly a lot about fiscal./3
For CBs, it´s mostly about liquidity supply via QE and targeted liquidity to help the survival of viable firms (SMEs) that will lose revenues during months. Liquidity programmes with incentives for banks to continue to finance them and possibly some temporary forbearance./4
Fiscal policy needs to support affected sectors. The goal is that the economic shock doesn´ t morph into a financial crisis. Fortunately, the financial system is stronger now and rate cuts are not the first line of defense in Europe. Weaker banks would complicate the response /5
Some policy rate cuts will become unavoidable for the CBs that have space to do so. That may help stocks but the stock market should not be the focus of policy, but rather the general support to the economy./6
For some observers, the stock market crash raises the question of whether such events predict/cause recessions. In 1966 Samuelson quipped on Newsweek that the stock market had predicted 9 of the last 5 recessions. However, being correct more than 50% would not be too bad /7
But it´s worse. Since 1928 the US had 47 sell-offs, with 20 bear markets (at least -20%) and 27 corrections (between -10 and -20%). Only 16 were associated with recessions. The economic problems that can determine a global recession are now much broader than stock exchanges 8/8
