Sunak and Carney have delivered a combined monetary and fiscal stimulus of breathtaking panache, each reinforcing the other for maximum effect in a textbook display of timely coordination.
telegraph.co.uk/business/2020/…
telegraph.co.uk/business/2020/…
The preemptive "shock and awe" package cannot prevent recession as Covid-19 shuts down swathes of economic activity, but it can prevent "sound" firms from spiralling into trouble as output hits a sudden stop and liquidity evaporates.
It reduces the risk of a credit crunch that can in turn set off a negative feed-back loop through the lending system. The benefits should feed through later this year and ensure that the U-shaped recovery does not not stretch into an L-shaped slump.
“The combined UK monetary-fiscal actions will add up to the most comprehensive, balanced and integrated policy response to the virus yet seen internationally. This exposes the lack of response to date in the EU and the US,” said Evercore ISI in Washington.
The EU is struggling to mount any coherent response. While the US Fed has cut rates by a half point, the ECB seems paralysed: already closer than Anglo-Saxon central banks to policy exhaustion before the pandemic, having played its last big card in September, it is now powerless.
The EU’s legalistic spending machinery will limit any fiscal punch and slow the roll out of crisis measures. Still no eurobonds, no shared budget, no mutualised pan-eurozone deposit insurance for banks ...
... which leaves vulnerable Italy in the worst of all worlds: deprived of sovereign economic instruments yet without EU fiscal support to compensate.
Merkel warned 70% of Germans could be infected but didn't draw the economic conclusions. She spoke of a €25bn EU crisis package, less than 0.2% of GDP, but no fiscal spending for Ger itself beyond a trivial €275m for health care. Fiscal stabilisers will have to carry the load.
Germany even refused to sell Italy anti-virus masks and equipment in its hour of need. National security worries about Chinese supply chains are now extending to internal supply chains within the EU. You can only count on your own nation-state when push comes to shove.
The Bank of England’s triptych of measures is a masterpiece. The emergency half-point cut in rates counters the danger of seizure in the interbank lending markets after the FRA/OIS (forward rate agreement/overnight index swap) spread rocketed to crisis levels.
The new Term Funding Scheme for small firms could unlock £100bn of lending. The cut in the counter-cyclical buffer for banks frees up another £190bn. Paul Dales from Capital Economics says the package creates a potential credit boost worth 13% of GDP.
Rishi Sunak’s instant £30bn fiscal package and copious support measures for business to fight the coronavirus are worth 1.5% of GDP, front-loaded and highly-concentrated, and amount to the most radical move taken so far in any western country.
The Chancellor is also right to ditch austerity, tear up the rule book, and adopt the new orthodoxies or “best practice” - as he put it - of the global economic fraternity, multilateral bodies, the International Monetary Fund, and indeed the markets.
His plan to raise public investment to levels unseen since 1955 and push infrastructure spending towards 5% of GDP (public and private together) over this Parliament is marvellously refreshing after the misguided cuts into the muscle and bone of our productive system...
... over the last decade - all in the name of a mechanical target with no scientific justification. In a world of excess capital, zero rates, and looming deflation, the old rules were a ball and chain.
No external constraint on borrowing: yields on 50-year gilts have dropped to 0.47% (negative in real terms). The country can borrow for free. Austerians have yet to come up with an argument on why global conditions are about to change since all the underlying pathologies remain.
UK’s 2019 cyclically adjusted budget deficit was 1.4% of GDP, viz 2.9% Japan, 3.4% France, 6.1% China, 6.3% US, 7.4% India. We don’t face a roll-over refinancing crunch in early 2020s. The existing stock of debt is on the longest maturity of any major country: more than 14 years.
The sophisticated view after a decade of "secular stagnation" is that the wrong kind of austerity is not only a brake on economic growth but self-defeating since it raises the debt ratio, ceteris paribus, and curbs productivity growth.
Infrastructure and investment projects with a multiplier above 1.0 pay for themselves over time and therefore lower the ratio. Recent scholarship suggests the multiplier is much higher than long supposed, often nearer 3.0, in a global economy with rates pinned to the floor.
"The last thing on earth you should be worried about in the UK is the budget deficit," said Harvard professor Ken Rogoff, the high priest of discipline, in an interview with The Telegraph.
The EU is also coming round to the view that austerity was not such a good idea but they have built a contractionary bias into the legal system through the Stability Pact, the Fiscal Compact, and plethora of impenetrable rules. It takes treaty changes to reform this monster.
The measures floated so far are disjointed, piecemeal and inadequate. Yet the eurozone is clearly heading straight into a recession. HSBC has just slashed its forecast, predicting a contraction of 0.4% this quarter and 1% in the 2nd quarter, with the worst in Italy and Germany.
“The risk of widespread insolvencies could scotch the prospect of a V-shaped recovery,” it said. So once again the ECB must step into the breach. But what can it do? Rates are -0.5%. Bond yields are negative across most of the eurozone, blunting the effect of any further QE.
The ECB is likely to step up corporate bond purchases by €10bn a month when it meets tomorrow, Citigroup predicts. That scarcely moves the needle. It will extend unlimited cheap funding for banks (TLTROs) but that cannot alone revive the economy when bank stocks are collapsing.
The ECB could in theory go radical and buy assets across the board. It will not do so for political reasons, at least not yet. The Gov Council is still licking its wounds after Draghi overruled Germany and more than half the bloc’s GDP last September in pushing through stimulus.
It has never before been so divided. The new ECB president, Lagarde, is determined to restore comity. That means caution. There is no longer any way for Europe or the world to avoid a full-blown economic shock. But at least Britain is putting in place some shock absorbers.
