Global Growth Outlook 04/2020

April 2020 GLOBAL GROWTH OUTLOOK

Coronavirus Shock for Global Economy Financial and Economic Policy in the Recession

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Germany is likely to see its gross domestic product decrease between three and six percent this year. This forecast is based on an interruption of economic activity for a maximum of six weeks.

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Global economic output will drop by up to three percent. Global output has only ever fallen once in the last 50 years: in 2009 by 1.7 percent. We expect global trade to decrease by three to five percent at best, compared to the previous year.

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A severe recession is no longer avoidable in the United States, Europe and Japan this year. In 2020 the economic strength of the euro area and the EU is heading for a fall of three to five percent, the United States by two to four percent, and in Japan by one to three percent. China is still expected to record growth of up to two percent.

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Many governments and central banks have launched measures to prop up the economy. Further fiscal stimuli will be required in the wake of quarantine measures. The United States has already adopted first measures and China and Japan will follow suit.

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The EU’s fiscal support and stimulus packages are still inadequate. Germany has taken the lead with a large package of measures. Many countries will need further high-volume measures. In Europe, a significant effort to countering the effects of the coronavirus can and must be made on a supranational level. A sustained recovery programme must begin after the exit from quarantine.

Coronavirus Shock for Global Economy | Financial and Economic Policy in the Recession 16/04/2020

Content Coronavirus slams global economy ................................................................................................. 3 Global economic recession unavoidable ............................................................................................... 3 Divergent trends within the triad ............................................................................................................ 4 Global trade and direct investment ....................................................................................................... 5 Coordinated response required ............................................................................................................. 6 Financial policy ................................................................................................................................... 7 EU, Eurogroup and European Investment Bank ................................................................................... 7 EU Member States ................................................................................................................................ 8 Switzerland .......................................................................................................................................... 12 United Kingdom ................................................................................................................................... 13 United States ....................................................................................................................................... 13 Japan, South Korea and other Asian countries................................................................................... 17 China – how fast will the Chinese economy recover? ........................................................................ 17 Monetary Policy ................................................................................................................................. 18

G7 and G20......................................................................................................................................... 21

The IMF: Emergency financial assistance available to developing countries ............................ 21

Conclusion ......................................................................................................................................... 22

Sources .............................................................................................................................................. 23

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Coronavirus Shock for Global Economy | Financial and Economic Policy in the Recession 16/04/2020

Coronavirus slams global economy Most major countries around the world imposed severe measures in quick succession in February and March to protect public health and tackle the coronavirus pandemic. These measures have drastically curtailed public life, with restrictions to remain in place in most countries until the middle of April at least, or even May or June, as things stand. Extensive restrictions have also been placed on travel and leaving the home. Most shops are closed and a whole range of economic activities have been banned.

In Italy and Spain, most businesses have had to shut down for a period of at least two weeks. Only in China and South Korea is public life gradually returning to normal with economic activity resuming following several weeks of severe restrictions. Other countries in South-East Asia, such as Taiwan and South Korea, have managed to curb the pandemic within their borders without imposing larger-scale restrictions.

These public health measures present a severe shock to supply and demand in the global economy.

Air and tourist traffic, tourism and hospitality are most directly affected by the collapse in demand, but many small and medium-sized enterprises from numerous service industries have also seen their demand and thus their income cave in. In China, car sales were particularly hard struck by the period of severe restrictions. Up to the third week in March, disruptions in manufacturing output due to bottlenecks in supply remained the exception but this could still become a global issue if freight transport from China and soon from the United States and specific European countries, continues to be disrupted. Major companies, particularly in the automotive sector, have shut down production in Europe and the United States for a few weeks purely for health reasons. Production in East Asia, meanwhile, is restarting following several weeks of disruption. The biggest concerns on the supply side, meanwhile, were disruptions in supply chains caused by the stop in production in several regions throughout China and blocked transport routes. Europe is now experiencing similar problems caused by the closure of companies and interruptions in freight and logistics.

This shock to supply and demand is leading to massive slumps in individual industries, where production, value-added and employment are coming to a standstill in some cases. Sales have veritably collapsed in some industries. Even in the shortest of terms, such shocks create liquidity and solvency problems that require very swift action by governments, the lending sector and capital markets to prevent businesses from collapsing and to avoid plunging levels of employment and income.

Central banks and governments have already adopted very extensive packages of measures to mitigate the economic impact for citizens and the business sector.

The speed at which the pandemic has unfolded, as well as the speech of the economic impact and the monetary and economic policy reactions of governments and central banks, is very high. While this makes any outlook on economic development highly uncertain across all three components, preliminary estimates can nonetheless be made.

Global economic recession unavoidable This year the global economy will fall into a recession, defined by the IMF as less than 2.5 percent real growth of economic output. In view of the experience of China, we can expect most countries in Europe and the United States to see severe drops in their economic activity levels in the first and second quarter. Whether and to what extent the global economy will begin to recover in the second half of the year will depend largely on how successful the health policy measures prove to be and whether further measures become necessary in the further course of the year. According to preliminary estimates by

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the OECD and the International Monetary Fund, severe quarantine measures cost industrialised countries an annualised two to three percentage points in real economic growth on average (IMF 2020a, OECD 2020a). During the months in which severe restrictions are imposed, short-term drops in value added of between 20 and 25 percent are likely, with some industries seeing drops of up to 70 percent, and even higher in air travel. Decreases in value added of between 30 and 40 percent are commonplace in industries directly affected by the restrictions. In most countries, direct measures are impacting between 30 and 40 percent of domestic value added.

In view of the restrictions on economic activity in place since the middle of March, growth over the year will be marginal at best, even if the further spread of the pandemic is swiftly stopped and health policy and company-level measures are eased. In the more severe scenario presented by the OECD in early March – and in which the world currently is – it had forecast half of a percentage point of real growth compared to the previous year (OECD 2020). This already seems optimistic as things now stand.

Estimates from private companies are also forecasting severe slumps (Allianz 2020, Deutsche Bank Research 2020a-c), with major drops in Europe.

Divergent trends within the triad The major economic regions will experience a very different downward trend and possible recovery.

China suffered a major slump in January and February. Economic output dropped around ten percent in both months, industrial production by 13 percent, and retail sales and investment by slightly over 20 percent. With public life and economic activity in China gradually returning to normal, the country should return to growth in the second quarter. For the year overall, economic output could grow by between zero and two percent.

In the European Union, much will depend on how fast the stringent public health measures take effect in Italy, Spain, France, Germany and many of the smaller economies. With measures already imposed in most countries, economic activity is likely to drop substantially in the first six months of the year.

Performance in the further course of the year will largely depend on whether production is restarted and whether public life and economic activity can begin to return to normal and, if so, whether the transition back to normalcy takes place smoothly or whether value chains can only be revived gradually over a series of weeks. The annual result will also depend substantially on whether further major financial policy measures involving higher expenditure and lower taxes and duties are adopted in the current budget year to support economic activity.

Due to the varying significance of the industries directly affected and the divergent measures taken to curb the spread of the pandemic, Italy and Spain will be the hardest hit countries. According to some estimates (Deutsche Bank 2020a), if no further countermeasures are taken, economic activity could drop by a good eight to nine percent this year on account of the slumps in tourism, hospitality and transport as well as extensive plant closures. The drops in France, the United Kingdom and Germany should be somewhat less pronounced.

On account of the very extensive aid programmes adopted by the member states and the European institutions, there is a chance that economic activity can be stimulated from May or June onwards.

Support measures taken by most member states so far have been targeted at securing corporate liquidity, employment and income levels. Once economic activity has been resumed following the successful containment of the corona crisis, further measures to reanimate economic activity are likely to be taken. By and large, the content and scope of the measures adopted to mitigate the economic

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damage so far are adequate to help cushion the severe drops. The automatic stabilisers will also take effect in all countries.

For the year as a whole, it is safe to say that economic activity in the euro area and in the EU will drop by three to six percent. If activity is interrupted for just a few weeks the drop may be just three percent compared to the previous year, but if the disruptions last for two months it is more likely to be five to six percent, or even up to between five and ten percent if there are several brief interruptions during the year.

The United States is also heading for a severe recession. Economic activity is set to drop by two to four percent over the course of the year, with very steep drops in the second quarter. As the country is still at a comparatively early stage of fighting the pandemic, uncertainty here is particularly high.

The pandemic is also having a huge impact on many developing countries and is endangering their economic activity. Many countries are therefore likely to drop into recession in the short term, with knock-on balance-of-payment difficulties, and will need aid from the International Monetary Fund.

According to the IMF, more than 100 countries have already applied for emergency loans.

Global trade and direct investment Global trade will register a massive decrease as a result of the corona crisis. Along with production downtimes due to employees becoming ill and reduced production through infection control measures, national export restrictions are also on the rise. These restrictions do not just curb production and sales but also send out a disastrous signal and trigger knock-on effects. The World Trade Organization is now listing export restrictions on its website as part of a transparency initiative. At present, twelve countries have notified 27 trade and trade-related measures (including export restrictions and bans, exceptional and temporary criteria, suspension of compulsory certification, trade facilitation) to the WTO (as of 8.4.2020). The WTO is expecting a massive drop in merchandise trade of over 30 percent in 2020.

Growth in real gross domestic product in 2020 compared to the previous year (in percent) based on a one-off disruption of 4-6 weeks

Global economy

(-3) – (-½)

Euro area

(-5) – (-3)

World trade

(-5) – (-3)

EU

(-5) – (-3)

USA

(-4) – (-2)

Germany

(-6) – (-3)

Japan

(-3) – (-1)

China

0 – (+2)

Source: BDI

In this environment, worldwide investment activity and industrial production will also decline. UNCTAD, the economic organization of the United Nations, is expecting the corona crisis to lead to a slump in

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global direct investment of 30 to 40 percent in 2020 (UNCTAD 2020). Some industries will even see a much larger drop. The pandemic is affecting all components of foreign direct investment. The announcements of mergers and acquisitions around the world will be down by 70 percent in the first quarter, according to UNCTAD. Coordinated response required Faced with the biggest recession since the Second World War, governments and central banks will have to deploy a lot of financial firepower to stimulate the economy. Given that almost all major economies are bound to experience a severe slump in the second quarter – in the case of China this already happened in the first quarter – and with global disruptions in the further course of the year highly likely, governments and central banks must, as a first step, provide extensive liquidity and solvency to protect the private sector in these extraordinary circumstances. This is mostly already taking place. Almost all central banks and governments have recognised the full scale of the problem in the last two weeks and are working on their political response.

It is becoming clear that the liquidity measures of governments and central banks will require a volume of between ten and 20 percent of GDP in a medium-case scenario of one-time stringent lockdown measures of six to eight weeks. From a fiscal perspective, automatic stabilisers will generally account for additional deficits of between two and three percent of GDP in the course of the year, with further active measures to support the economy taking up to another three percent of GDP, depending on the individual country. This will lead to unexpectedly high deficits in public budgets, with a foreseeable average value of ten percent of GDP and even more in some countries. This even surpasses the levels recorded during the years of the great economic and financial crisis.

The central banks were the first to take steps. The Fed has injected extra liquidity of over one trillion U.S. dollars, the ECB around 1.2 trillion euros of fresh refinancing for banks and over one trillion euros in quantitative measures. The Bank of England also intervened on a massive scale with a 645 billion pound package of quantitative measures. The central banks may well step up their measures if it turns out not to be just one slump but repeated slumps, or the drop is steeper than expected. Amendments have been made to banking regulations to reduce and use the capital and liquidity buffers commercial banks are required to hold. Regulations have also been eased to support the supply of credit to the business sector.

Most governments have adopted extensive measures to secure liquidity, mainly in the form of guarantees and cash injections. The G20 puts the volume of these measures at five trillion U.S. dollars.

Some governments have also adopted capital injection measures either as a package or in individual cases. Beyond this, most governments have also implemented social policy measures to mitigate the impact of the crisis on the disposable income of households and stabilise private consumption. The automatic stabilisers will also kick in, meaning that social spending will increase and tax revenue will decrease. The affected countries should accept higher public deficit levels in order to mitigate the consequences of the crisis.

Measures to stimulate the economy are also already on the table in many countries. These will only be able to take effect once the stringent lockdown measures have been eased. Only then can increased demand through tax breaks and targeted incentives and measures to prop up the supply side for businesses really become effective.

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Fiscal policy In the European Union, governments of the major economies have implemented extensive public health policy measures within a very short space of time. At the same time, governments have also initiated support measures for companies and employees. These measures already include fiscal policy measures in the form of stimulus packages to the volume of around two percent of GDP and for safeguarding liquidity to the volume of 13 percent of GDP. In a second step, measures have been initiated on the European level in response to the crisis. The European Commission has eased regulations for state aid to facilitate measures to counter the pandemic, while the EU council of ministers for economy and finances (ECOFIN) triggered the general escape clause in the Stability and Growth Pact. These steps have paved the way for national aid measures to be allowed under European law. European institutions are also consulting on how EU instruments can be used to kick-start the economy.

EU, Eurogroup and European Investment Bank On 10 March, the heads of state and government of the EU (and before then at ministerial level) agreed to increase coordination, identifying the following four priorities: 1. Sharing information on public health measures on a daily basis; 2. Tasking the European Commission with securing the supply of medical products; 3. Stepping up research for a vaccine; 4. Assistance for the economy, in particular the provision of liquidity for SMEs and especially affected sectors. At the ECOFIN meeting it was also clarified that additional budget costs are permissible under the regulations of the Stability and Growth Pact in the event of extraordinary circumstances.

On 16 March the finance ministers of the euro countries convened to agree on the coordination of national measures. Eurogroup head Mรกrio Centeno emphasised that the euro countries would do everything in their power to manage the crisis. Automatic stabilisers should be allowed to take effect.

The implementation of provisional measures should be based on the specific situation of individual countries. This includes immediate financial aid to help curb the spread of the virus and treat those who fall ill, the provision of liquidity measures for businesses especially affected by the crisis, in particular for small and medium-sized enterprises (in the form of tax breaks or public guarantees), and support measures for employees to prevent incomes from dropping and jobs being lost, for example through short-time work and further measures. Additional financial policy measures with a volume of around one percent of GDP had already been decided at that point, flanked by additional guarantee measures to safeguard liquidity with a volume of around ten percent of GDP. European Investment Bank lending programmes The European Investment Bank (EIB) has meanwhile been requested to set up an eight billion euro programme to provide working capital financing to around 100,000 European companies. This will be stepped up by a further twelve billion euros to provide financial assistance to a further 150,000 companies. The EIB will additionally invest a further ten billion euros in small and medium-sized enterprises, scaling up to 20 billion euros in the short term. The EIB has also proposed special purchase programmes to the volume of ten billion euros for asset-based securities (ABS) with which banks can transfer the risks of SME lending portfolios (EIB 2020). The EIB is expected to work in close coordination with the national development banks in implementing these plans. Additional measures are being prepared already, scaling the lending envelope to 200 billion euros.

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Corona Response Investment Initiative 18 March saw the launch of the Coronavirus Response Investment Initiative with a volume of 37 billion euros (just over ten billion euros of unutilised funds from the Structural Fund, co-financing by the member states). These funds are also designed to ensure that support measures can be initiated swiftly. The corresponding regulations were passed on 30 March and entered into force on 1 April.

Employees will also be able to benefit from more rapid funding measures through the European Solidarity Fund. The fund will now be made available to tackle the current emergency.

ESM loans On 24 March broad consensus was achieved among finance ministers to use the ESM. The ESM currently has an unutilised lending capacity of 410 billion euros. The ESM has two different precautionary financial assistance credit lines, of which the Enhanced Conditions Credit Line (ECCL) is best suited for the current purpose, according to Klaus Regling, managing director of the ESM, and Mario Centeno, chair of the Eurogroup. The preparations are expected to be concluded shortly, after which individual countries can apply for these credit lines. The volume of loans currently in discussion are up to two percent of GDP with relaxed requirements. The ESM theoretically also has other instruments, such as the direct and indirect recapitalisation of banks, which could be used where necessary and if the corresponding conditions are fulfilled. Whether this is a politically feasible option is another question, as the governments of the nine southern euro area countries would prefer other channels of financing.

Further options The need for strong financial policy measures to counter the recession has reignited the debate on new types of bonds. Nine heads of state and government, including France, have expressed their support of joint bonds. The heads of state and government failed to reach an agreement on 26 March and postponed the discussion, giving economics and finance ministers two weeks to submit proposals.

Economic scientists have also presented various proposals (Benassy-Quere et al. 2020, Bofinger et al. 2020, Claeys and Wolff 2020). The only rapidly available instruments for joint financing are European Commission bonds or European Investment Bank bonds. Proposals for joint bonds with joint liability still raise questions concerning European law and practicalities that have been heatedly debated for years. However, a proposal for rapid implementation is still not on the table. Nonetheless, it may prove possible in the next few months to pave the way for debt instruments to enable more concerted and appropriate action to counter the crisis.

EU Member States Germany In Germany, public life has been substantially restricted since Chancellor Merkel’s TV address on 18 March at the latest. To stop the spread of the coronavirus as effectively as possible, the government has banned a wide range of economic activities. Schools closed two weeks before the Easter holidays in almost all federal states. Public life will not revert to normal before the end of the Easter week. To mitigate the economic consequences for citizens and businesses, the Bundestag and the Bundesrat approved an extensive legislative package in the 13th calendar week. As these measures involve

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additional expenditure of 122.5 billion euros and foregone tax revenues of 33.5 billion euros, a supplementary budget was required, which saw the federal republic taking on a net credit to the volume of 156 billion euros. The debt brake has had to be suspended to allow for this high deficit.

A regulation facilitating short-time work (Kurzarbeitergeldverordnung – KugV) was adopted to cushion the knock-on effects on the labour market and ensure that workers can resume their jobs once the restrictions have been lifted. This regulation has made access to the short-time work allowance much easier. The minimum proportion of employees affected by a lack of work was lowered from one-third to ten percent. Until the end of the year, employers also will not be required to pay the social security contributions normally payable on the short-time work allowance. These contributions will instead be paid in full by the Federal Employment Agency. Temporary workers can also qualify for the short-time work allowance. The regulation entered into force with retroactive effect as of 1 March 2020.

Small companies from all economic sectors as well as self-employed individuals and members of the liberal professions with up to ten employees are eligible to apply for the immediate corona relief for self-employed individuals and SMEs in the form of a one-off payment to secure their liquidity for three months. The amount is dependent on the size of the company with up to 9,000 euros available for companies with up to five employees and up to 15,000 euros for companies with up to ten employees.

The emergency fund has a volume of up to 50 billion euros, available to a maximum of three million self-employed individuals and micro companies.

Larger companies from the real economy (with a revenue of at least 50 million euros and 250 employees) are receiving support under the Economic Stability Fund Act (WStFG). Assistance from the Economic Stability Fund (WSF) is designed to secure jobs, supply chains, and the value added of these companies. The package has a volume of 600 billion euros. This consists of a guarantee framework of 400 billion euros to make refinancing on the capital markets easier for companies and thus assist them in bridging liquidity squeezes, 100 billion euros in credit authorisations for direct recapitalisation measures (acquisition of shares, silent participations, etc.) and 100 billion euros in credit authorisations to refinance the transmission of these transactions through the German stateowned development bank (KfW). The stabilisation measures can be tied to conditions (e.g. board compensation, payment of dividends, use of funds).

The impact of these measures on growth will ultimately depend on how long the government restricts economic activity in Germany. According to scenarios calculated by the Kiel Institute for the Global Economy (IfW 2020), German GDP would drop by around 4.5 percent in the best-case scenario of a short interruption and rapid recovery. If it takes longer, German GDP is set to drop by around 8.7 percent. Scenarios by the Munich-based ifo Institute (ifo 2020), based on the business prospects of the preliminary ifo business climate index, range between minus 4.3 and minus 20.6 percent depending on the duration of the lockdown and recovery phase (scenarios range from one to three months including best and worst-case scenarios). GDP decrease in 2020 in the case of a two-month shutdown ranges from 7.2 to 11.2 percent. According to the German Council of Economics Experts (2020) the corona pandemic will precipitate the German economy into recession. As things stand, however, the economic experts believe that a quick and sustained recovery is likely. The Council thinks that the most probable scenario at present is a five-week shutdown followed by a brief period of recovery. Gross domestic product in Germany would then drop by 2.8 percent in 2020 and grow by 3.7 percent next year. During the crisis in 2009, gross domestic product dropped by 5.6 percent in real terms and then expanded in the two following years by 4.1 and 3.7 percent respectively. The

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manufacturing sector recorded production decreases of over 15 percent. In contrast to the current crisis, the service sector was hardly affected by the 2009 crisis.

The return to pre-crisis normality is the decisive factor underlying all these predictions calculating the impact on production levels. These predictions do not include possible upheavals in consumer behaviour, company insolvencies, impact on private investment and foreign trade, or the financial policy adopted by the government to counteract these changes. The additional expenditure planned in the supplementary budget will have a stabilising impact.

France In two steps in mid-March, France imposed increasingly stringent restrictions on public life and ordered the closure of non-essential shops. The French government implemented a row of measures with immediate effect to support companies affected by the Covid-19 crisis. These measures and higher healthcare expenditure will be financed by a supplementary budget of 45 billion euros (about two percent of GDP). The package of measures covers approximately 13 percent of France’s economic output and is of a similar scope and content to the German package of measures. Discussions on measures to revive the economy once the pandemic has been successfully tackled have not yet been made public.

The French government will secure the liquidity of its companies with guarantees on bank loans to the sum of 300 billion euros. Banks will extend the repayment of business loans without charge by six months. Companies can also apply to stagger or defer social security contributions very easily and unbureaucratically by email. Deferred tax payments and tax breaks will be reviewed on a case-by-case basis for businesses threatened with bankruptcy. Applications for short-time work have been simplified, the short-time work allowance is 70 percent of gross salary and 100 percent of net salary in the case of training measures. Micro companies that have been severely affected, such as hotels and restaurants, can apply for a grant of 3,500 euros. They can also defer the payment of rent, water, gas and electricity bills. Approval procedures in the construction and chemistry sectors have been simplified to facilitate alternative procurement arrangements. The government has also announced that equity participations in companies may prove necessary.

Italy Italy was the first European country to experience a huge outbreak of the corona pandemic. Around 13,000 people have since died from the virus in the country. This is the highest number of fatalities worldwide. Italy has been in strict lockdown for several weeks already. On 22 March the Italian government also ordered industry and retail to stop production except for transport and logistics, healthcare and pharmaceuticals, energy, agriculture, postal services, and banking and financial services. The Italian business association Confindustria has calculated that the production shutdown is costing the Italian economy around 100 billion euros a month (just over five percent of GDP) and is expecting economic output to drop by six percent this year (Confindustria 2020).

On 16 March, the Italian government adopted Cura Italia, its first package of measures with a volume of 25 billion euros to mitigate the effects of the corona crisis. More packages are to follow, with the next one due in April. A large proportion of the aid package is directed at supporting labour and employment.

The package includes a moratorium on the repayment of corporate debt, one-off payments of 600 euros in March for the self-employed and seasonal workers, paid part-time work for parents and

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babysitting vouchers. The package also includes tax breaks to support the liquidity of companies. Small companies and households can also be temporarily exempted from making their mortgage interest payments. In view of the huge scale of the crisis, the measures announced by the government so far are meagre. Italy will very likely need a package with guarantees to safeguard well over ten percent of economic output and capital measures to additionally support the economy and, in a next step, considerable stimulus to revive the economy once the pandemic has been curbed. European funds through various channels will also be needed.

Spain Spain is one of the countries in the EU that has been hardest hit by the coronavirus with particularly difficult conditions in its capital city. Spain’s economy will be greatly affected, particularly in the tourism and hospitality sectors and in the automotive industry. However, the government responded to the crisis at an early stage, imposing massive restrictions on public life. In late March it also decided to shut down all non-essential economic activity. Essential activity includes the production and sale of everyday products (food, medicine), the healthcare sector, energy supply, telecommunications, transport services, financial services, e-commerce, the press and the security sector.

On 12 and 17 March respectively, the Spanish government adopted two packages of measures with extensive assistance for companies, workers, self-employed individuals, families and healthcare services. These amount to around ten percent of economic output, also mainly in the form of guarantees. The Spanish development bank, ICO (Instituto de CrĂŠdito Oficial), will provide guarantees of up to 100 billion euros to facilitate the provision of loans to companies and the self-employed.

Furthermore, the debt limit of the ICO has been extended by ten billion euros so that it can top up the financing lines available to the self-employed and companies. The aid package also includes additional guarantees of up to two billion euros that can be granted by the Spanish export credit agency CESCE to support exporting companies with operating loans.

The Spanish government has also eased bureaucratic requirements on companies, including an extension of tax deferrals by six months and the option for companies that have received loans from the General Secretariat for Industry and Small and Medium Enterprises to postpone their repayments.

Insolvency applications will not be accepted for the duration of the state of emergency or for the following two months. Companies with up to 50 employees have been temporarily exempted from paying their social security contributions. Employees can structure their working and attendance hours more flexibly now if they need to look after relatives due to the current crisis. The authorisation procedure for temporary employment regulations (ERTE, similar to German short-time work) has been accelerated. Employees whose work contracts are suspended temporarily receive unemployment benefit even if they do not meet the minimum contribution requirements and without using up the benefit entitlements they have already accumulated. The government will also safeguard the supply of electricity, gas and water as well as telecommunication services to vulnerable groups. Mortgage payments will be suspended for one month.

Austria The Austrian government has introduced extensive measures to mitigate the anticipated recession with a volume of 38 billion euros. The package includes financial support for short-time work and has since been extended to cover companies of all sizes and industries. Corona-induced short-time work can be approved within 48 hours instead of the minimum of six weeks this previously required. For the

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first time, it is now possible for employees to work from home 100 percent of the time and still be employed by the company. SMEs are supported through loan guarantees and bridge financing, and these measures are now now available to larger companies, too. The funds for SMEs that require guarantees will be topped up to ensure that every company that needs a guarantee gets one. The package also includes support for the tourism industry in the form of additional guarantees and other measures such as the deferral of social security contributions, taxes and instalment payments and cancelling default interest. The government has also set up a hardship fund for companies in particularly affected industries and small family-run businesses that do not benefit from the government support measures.

The Netherlands The pandemic has hit the Dutch economy hard. The crisis has impacted almost all its industries, particularly construction, agriculture, hospitality and the transport sector. The Dutch government, too, has introduced an extensive emergency package to support businesses and has confirmed it will take further steps if necessary. The public finances are in good shape so the scope for a stabilising financial policy can be fully exploited. A total of 15.6 billion euros has been approved so far. Companies that face a drop in sales of at least 20 percent from 1 March 2020 can apply for wage subsidies of up to 90 percent of the full wage, thus securing the continued payment of all employees on permanent or fixed-term contracts. Companies can also apply to their tax authorities to have their tax payments postponed. Applications will be verified later with no interest due on overdue tax. The government has also eased the guarantee requirements for its SME loan scheme. Financing is granted to SMEs with a guarantee loan that has been raised from 50 percent to 75 percent to mitigate liquidity problems. The self-employed can also apply for financial aid in the form of additional benefits for living costs and/or operating capital. Smaller companies in particularly affected industries can also receive one-time compensation of 4,000 euros. In addition to the government’s package, banks have agreed to grant businesses that are fundamentally healthy a six-month grace period on their current loans.

Belgium The Belgian government has also adopted several measures to support businesses and the selfemployed. The government expects the support measures to amount to ten billion euros and has made a further billion euros available to its healthcare system. Until June 2020, companies that are at risk of having to lay off employees can apply for a 70 percent average wage subsidy with a ceiling of 2,755 euros. The government has also simplified and accelerated the application process. Further measures include extensive tax deferrals and help with the payment of social security contributions through newly agreed payment plans or deferral and exemption for the self-employed. Self-employed individuals who cannot carry out their occupation because of Covid-19 receive financial assistance of 1,291.69 euros per month (without family) or 1,614.10 euros per month (with family). No penalties or sanctions will be imposed on any contracts commissioned by the federal government that are delayed or cannot be executed because of Covid-19.

Switzerland The Swiss government has decided on an extensive package of measures worth 40 billion Swiss francs. It includes a guarantee scheme of 20 billion francs to provide companies affected by the crisis with bridge loans. These loans are to be made available to companies swiftly and unbureaucratically and cover up to ten percent of revenue or a maximum of 20 million francs. Up to 500,000 francs will

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be paid out by banks immediately and guaranteed by the federation to 100 percent. Sums above this threshold will be subject to a short bank review prior to approval and guaranteed by the federation to 85 percent. The loans of up to 500,000 francs should cover over 90 percent of the companies affected by the crisis. Further measures include the interest-free deferral of social security contributions and substantially expanded compensation for short-time work, for example to cover workers on fixed-term contracts. The Swiss government has further declared a nation-wide standstill on debt collection procedures and winding-up petitions until 4 April. Self-employed individuals affected by the crisis are also included in the package. They are eligible for compensation of 80 percent of their income with a maximum of 196 francs per day. Immediate assistance and compensation for losses are available to the tourist industry and the cultural sector as well as sports organisations. The Swiss economics ministry is anticipating recession for the current year. Furthermore, the Swiss franc has trended upwards since the beginning of the year making Swiss products more expensive abroad. Exports are therefore heading for a steep fall for the first time since 2009.

United Kingdom After some initial hesitation, the UK government also introduced stringent public health protection measures in mid-March along with the largest aid package, in relative terms, in Europe.

In a first step, the UK government provided 330 billion pounds sterling in guaranteed loans and another 30 billion pounds sterling of budgetary funding for public services and grants (altogether equivalent to 15 percent of GDP). The Bank of England was authorised to purchase short-term debt of large companies to ensure liquidity. SMEs from almost all industries are eligible for individual loans of up to five million pounds with a state guarantee of now 80 percent. The self-employed and business owners can apply for a wage subsidy of up to 80 percent of wages with a maximum of 2,500 pounds per employee. Tax payments, especially value-added tax, can be deferred by three months. Furthermore, SMEs in the retail, hospitality and leisure sector will not have to pay business rates this year. Small companies operating in these sectors can also apply for assistance from 3,000 to 10,000 pounds. The government has requested authorisation from parliament for further fiscal measures should these prove necessary.

In a two-step process, the Bank of England cut interest rates from 0.75 percent to 0.1 percent. It also resumed its bond purchasing programme. Facilitations in IFRS 9 match those of other European countries. Insurances for business interruptions are to be paid out more easily (a government recommendation to shutdown is sufficient for eligibility). Companies that are not insured can receive an additional hardship grant of up to 25,000 pounds. Devolved administrations will receive 3.5 billion pounds to fund local assistance schemes. Costs so far incurred by local authorities will be reimbursed through the national budget. Separate schemes are being drawn up for airports and airlines.

United States Border closures and transport chains On 21 March 2020, the United States agreed with Canada and Mexico to close their common borders for “non-essential traffic� (i.e. leisure and tourist travel). So far, it seems there have not been any problems with deliveries of goods between the United States and its northern and southern neighbour.

According to the U.S. Customs and Border Patrol the waiting times at the borders are no longer than

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usual (U.S. Customs and Border Patrol 2020). Further travel restrictions have been imposed on people entering the country from China, Iran, the Schengen area and the United Kingdom.

U.S. freight transport has suffered from the extremely reduced number of passenger flights, as 60 percent of air cargo is usually carried out by passenger planes. The ports of Los Angeles, Miami and New York / New Jersey remain open for cargo ships but are on alert. Cruises are no longer taking place (Miami Dade 2020). To speed up the supply of medicines and consumer goods to supermarkets and producers, the U.S. authorities have increased the speed limits for trucks and eased working time regulations for truck drivers (The Wall Street Journal 2020).

Foreseeable impact on the economy Federal Reserve Chairman Jerome Powell said on 27 March “we may well be in a recession” (Politico 2020). A severe economic downturn is unavoidable, although forecasts differ regarding the depth and length of the recession. According to the U.S. Department of Labor, first-time claims for unemployment benefits rocketed from 281,000 to 3.3 million within one week, which is an all-time record rise (26 March 2020, U.S. Department of Labor 2020). From the week of 28 March to the week of 4 April 2020, the insured unemployment rate worsened from 2.1 to 5.1 percent. The insured unemployment rate is surveyed on a weekly basis and is a by-product of unemployment insurance programs, while the monthly unemployment rate includes those who do not profit from such programs. In this climate of uncertainty, Goldman Sachs revised its growth forecast for the year 2020 at the end of March from minus 3.8 percent to minus 6.2 percent of GDP with economic activity tumbling in the second quarter (forecast revised from annualised minus 24 percent to minus 34 percent of GDP) and strong catch-up effects in the second half of the year (Goldman Sachs 2020; CNBC 2020). On 25 March, Morgan Stanley had still forecasted a drop in GDP of three percent for 2020 (Morgan Stanley 2020). The downturn in consumption is curbing growth prospects to a huge extent. Consumption is an important pillar of U.S. GDP. Private consumption accounts for 68 percent of U.S. GDP (Bureau of Economic Analysis 2020). In 2019, consumption accounted for 80 percent of growth in GDP (The White House 2020a). According to the Consumer Sentiment Index of the University of Michigan, consumer confidence dropped by 11.8 percent in March 2020 alone (University of Michigan 2020).

Economic policy response U.S. Congress has agreed on three emergency packages. On 5 March 2020, Congress passed an emergency package with a volume of eight billion U.S. dollars. The focus of this package was to provide funds for the research and development of a vaccine (U.S. Congress 2020a). On 18 March 2020, Congress agreed on paid leave for those who are sick, free coronavirus testing, improved supply of food, extended unemployment benefits and the option to postpone the payment of tax debts (U.S. Congress 2020b). The Congressional Budget Office is still calculating the exact volume of the package but estimates put it at 300 to 500 billion U.S. dollars (DB Research 2020c). On 27 March, Congress passed a third emergency package. The volume of this package is estimated at two trillion U.S. dollars (around ten percent of GDP), which makes it twice as big as the relief packages of the Bush and Obama administrations during the last financial crisis. This stimulus package includes the following financial funds: ▪

500 billion U.S. dollars for large companies in the form of loans and assistance for companies, including 58 billion U.S. dollars for loans to U.S. airlines;

▪

350 billion U.S. dollars for loans to SMEs;

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▪

150 billion U.S. dollars in assistance for hospitals and other healthcare providers;

▪

250 billion U.S. dollars in payments to individuals with incomes of up to 75,000 U.S. dollars per year and up to 1,200 U.S. dollars for each adult and 500 U.S. dollars for each child;

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150 billion U.S. dollars in emergency payments for federal states and local governments;

▪

250 billion U.S. dollars for unemployment insurance. The duration of unemployment benefits has been increased by 13 weeks, and benefits increased by an extra 600 U.S. dollars per week. The range of eligibility for unemployment benefits has been extended to cover more employees.

Every company that receives a loan from the government will be banned from share buybacks for the duration of the loan and for one year after the end of the loan period. Companies that are owned by the U.S. President, members of Congress, executive federal employees and their immediate family members are not eligible for this loan programme.

State and local governments, which are largely responsible for managing medical emergencies, are also massively increasing their spending either through reallocations within their budget or through additional budget expenditure. California, for example, is spending additional funds of 600 million U.S. dollars (National Conference on State Legislatures 2020).

In terms of crisis management, the Trump Administration hesitated a long time before introducing measures to curb the spread of the coronavirus and its effects. President Trump also claimed that the virus was a “hoax” of the Democrats in their election campaign and compared the lung disease with the normal flu (France24 2020). As testing capacities were gradually expanded and ever more coronavirus infections were identified, the President declared a nationwide state of emergency on 13 March 2020. Individual states acted on their own initiative, independently of the Trump administration, with stringent instructions to stay at home and to shut down non-essential business.

Trump initially planned to lift the restrictions after Easter but backtracked on 29 March 2020, preparing U.S. citizens for an extension of the restrictions until the end of April 2020. In regions where the number of cases is very high, more stringent measures may be enforced. This is suggested by a letter from Donald Trump to the U.S. Governors, in which he announces new guidelines for regions with high, medium or low risk (The White House 2020b). However, Trump expects the U.S. economy to be back on a growth trajectory by 1 June 2020 (The New York Times 2020a).

The Defense Production Act The White House has invoked the Defense Procurement Act (DPA) of 1950 (The White House 2020c).

This act gives the President a wide range of powers to ensure that the domestic industry can meet national defence requirements. Among other things, the President can give government contracts for goods and services priority over civil sector customers and offer incentives to improve the production and supply of critical material and technologies. The Act was passed in the time of the Korean War and has been invoked more than 50 times already since 1950.

The White House used the powers of the DPA for the first time in this crisis on 27 March. Donald Trump required General Motors to “accept, perform, and prioritize contracts or orders for ventilators” (The White House 2020d). According to the New York Times, GM had been in negotiations with a medical

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company to produce ventilators (The New York Times 2020b). After the negotiations failed, Donald Trump ordered GM per Tweet to convert its production. Some U.S. producers such as Apple, Ford and Tesla are already working on the acquisition, production and distribution of needed products such as ventilators, respirators and hand disinfectant (Business Insider 2020).

Trade policy As a direct response to the corona crisis, the U.S. Trade Representative suspended some of the Section 301 tariffs on medical equipment from China in early March 2020 (International Trade Insights 2020). U.S. industry is advocating further tariff cuts. In a letter to the President of 25 March, a group of Republican senators urged the President to use trade policy measures to help reduce the economic strain on the United States (U.S. Senate Committee on Finance 2020): ▪

Coordination with other countries to prevent the proliferation of harmful export restrictions;

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Suspension of “buy American” requirements to avoid obstructing supply chains;

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Expansion of Section 301 tariff cuts on health, safety and medical products devices;

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Temporary deferrals of duty collection to boost liquidity for businesses;

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Moratorium on new or increased tariffs, while urging trade partners to do the same.

Although the Trump Administration has so far rejected further tariff relief, the U.S. Trade Representative has initiated a consultation process on tariff suspensions for products that are relevant to the medical response to the coronavirus. Interested parties are invited to submit written comments by 25 June 2020 to explain any modifications they feel are necessary to current tariffs.

President Trump is also planning an executve order to promote domestic production of drugs and medical equipment. This would involve extending the “Buy American” requirements to include pharmaceuticals and medical products. In the United States there is a high number of market access barriers for foreign bidders in particular for -state-level contracts. The “Buy American” requirements stipulate that a certain proportion of value added needs to be generated in the United States. This means that a certain percentage of a product needs to be produced in the United States with U.S. materials. Trump’s plans have been met with much resistance. In a letter to Trump, a group of pharmaceutical associations and patient organisations warned that Trump’s plans do not take into consideration the multifaceted pharmaceutical supply chains that enable industry to respond fast in public health emergencies and global crises.

Otherwise, the Trump Administration is pursuing its course on trade policy, focusing currently on the implementation of newly negotiated agreements. The U.S. Trade Representative and the U.S. Secretary of Agriculture announced progress in the implementation of the Phase One Deal between the United States and China, which entered into force on 14 February 2020 (U.S. Department of Agriculture 2020). According to U.S. Secretary of Agriculture Sonny Perdue, the measures taken show that China is going in the right direction in implementing the agreement.

Following the surprisingly rapid ratification by Canada, the Trump administration is also working full steam on the follow-up treaty to NAFTA, USMCA, so that it can enter into force on 1 June. Companies are warning that it will become very difficult, particularly in the automotive sector, to meet the more

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stringent rules of origin. Calls in Congress have also been growing to postpone the coming into force of the treaty due to the corona crisis (Inside U.S. Trade 2020).

Japan, South Korea and other Asian countries The Japanese government has also responded to the threat of a pandemic although only very few people have tested positive to the coronavirus so far. The government has provided a total of two trillion yen (equivalent to around 17 billion euros), with around half for healthcare measures and half to subsidise loans to affected companies. As the number of people that had tested positive in late March was only around 2,000, Japan has so far not implemented any restrictive measures. The Olympic Games have nonetheless been rescheduled for next year. Private sector estimates meanwhile anticipate that the country is heading for a severe recession as foreign trade with Europe and the United States will be disrupted on a huge scale. The Japanese government is working on a mediumsized economic stimulus and support package, with an expected volume of between one and three percent of GDP. The South Korean government has provided a total of just over 12 trillion won (equivalent to around ten billion euros) to bring the crisis under control. Australia has launched measures on a similar scale in absolute terms. New Zealand has decided on a package with an equivalent of four percent of GDP. China – how fast will the Chinese economy recover?

After seeing the number of new cases and fatalities decline steadily since the end of February, press reports are nourishing hopes that the Chinese government is still targeting a relatively high rate of growth of five percent for 2020 overall. However, this goal will be very difficult to meet. The monetary policy support measures taken by the country since the beginning of the epidemic, including the two cash injections for commercial banks of 800 billion renminbi in total, will not be enough to meet this very ambitious target. Special measures to support businesses, such as the reduction of or exemption from social security contributions and unemployment insurance for small and medium-sized companies only offers limited assistance to private enterprise. While state-owned enterprises can, as always, bank on government assistance, many private-sector businesses will be reeling from the corona crisis. The pandemic has been particularly damaging to the service sector, small and medium-sized companies and export-oriented companies.

In late March, the politburo of the Communist Party convened, chaired by Xi Jinping, to consult on economic support measures and the further tackling of the coronavirus. The top priority remains controlling the epidemic. In parallel, plans include a basket of support and stimulus measures to kickstart the economy. In the course of the meeting, five main areas were defined for financial policy, including an increase of the budget deficit ratio, the issue of special government bonds, an increase in the scale of special bonds to provincial governments, reducing the interest rates on credit markets and providing sufficient liquidity to industry. Detailed information on the economic situation and on the effectiveness of these measures are only expected to be announced at the annual meeting of the National People’s Congress in late April, which will also see the presentation of the annual government work report.

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Hopes for a V scenario with risks of a U scenario Following the weak figures on retail sales and industrial production in January and February, we can assume that the Chinese economy contracted considerably in the first quarter 2020. First quarter growth estimates put growth at negative 8.5 percent year on year. The high rate of unemployment, which hit a record high of 6.2 percent in February, will also serve to put additional pressure on the decision-makers in Beijing. There are nonetheless signs that the economy is regaining some momentum. The official purchasing manager’s index for manufacturing in China bounced back with surprising strength in March, rising from 35.7 to 52. The official index for the service sector also rose at an unexpectedly high rate, surging from 29.6 to 52.3. A recovery in the second quarter 2020 with robust growth rates of about three to four percent compared to the previous year could then result in a V-shaped recovery. In its most recent outlook of late March, the World Bank estimates a decrease in GDP growth down to 2.3 percent for 2020 overall in the event of such a hard but relatively short shock.

In a less favourable scenario with a renewed outbreak of the virus in the country and a sustained global recession, economic growth would drop down to 0.1 percent.

China is still in a crisis and life is only very gradually returning to normal. If China suffers a second wave of infection and a global recession puts additional strain on the economy, we can expect more negative economic news. With a growth rate of zero percent in the second quarter 2020, for example, the Chinese economy could take longer to recover and follow a U-shaped trend. Growth for the year overall could then be much lower, at around one to two percent compared to the previous year. The target set by the Chinese government of doubling GDP between 2010 and 2020 is slipping out of reach even in more optimistic scenarios as this would require real growth of at least 5.5 percent. Alongside economic growth, the political focus will also be on getting the unemployment rate down.

Monetary Policy ECB provides extensive liquidity and capital relief On 12 and 18 March 2020, the European Central Bank agreed on a double pack of comprehensive measures to mitigate the disruptions to economic activity that have already occurred or are foreseeable, especially regarding corporate financing through the banking system or the money markets. In a first step, the ECB made targeted and extensive decisions to stabilise the banking system and the financial markets. Key points were: â–Ş

Facilitated bank refinancing: the ECB will provide funds through full allotment with an interest rate of negative 0.5 percent until June. From June, TLTRO III (Targeted longterm Refinancing Operations) will come into effect with considerably more favourable terms (until June 2021). This will substantially simplify the support of bank lending for small and medium-sized companies, in particular. The interest rate for refinancing of banks that maintain their levels of credit provision over specific threshold values can drop to around minus 0.75 percent. With this package the ECB provides additional liquidity of around 1.2 trillion euros and is providing conditions at which it is, in some cases, foregoing central bank gains from these transactions.

â–Ş

Temporary increase in asset purchase programme: the ECB will add an additional one-off envelope of extra net asset purchases of 120 billion euros (over and above the current volume of 20 billion euros per month) until the end of the year.

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▪

Capital relief for banks: The ECB has made it easier for banks to operate temporarily below certain capital and liquidity levels defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR). Banks will also be allowed to use certain capital instruments to meet the Pillar 2 requirements that were only scheduled to apply as of January 2021.

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The member states are expected to take supplementary measures: The ECB expects appropriate easing of the countercyclical capital buffer, where such is used, by member states.

▪

No changes to interest rates: The ECB has left interest rates unchanged (interest rate on deposit facility at minus 0.5 percent, the main refinancing operations rate at zero percent and the marginal lending rate at 0.25 percent). A further reduction in rates would have required an even more complex regulation for banks.

On 18 March, the ECB decided on a second comprehensive package. This package is precautionary and “ahead of the curve” of market expectations to counter possible shortages of financing on the capital markets. This package is designed to stabilise market expectations in view of the risks of government bonds, particularly those of Italy, but also in view of possible liquidity stops in certain segments of the financial market in the euro area, such as in short-term debt or bonds from banks or non-financial enterprises.

The main components of the Pandemic Emergency Purchase Programme (PEPP) are: ▪

Large asset purchase programme. The programme has a scope of up to 750 billion euros up to the end of 2020, with further volumes and longer terms possible if required, and will include all asset categories eligible under the existing asset purchasing programme. The volume of the purchasing programmes already in place will be maintained (20 billion euros per month and one-time 120 billion euros). According to ECB information, the quantitative programmes will provide total additional liquidity of 1.3 billion euros (a good seven percent of GDP).

▪

Flexible use. For the purchase of public sector securities, the benchmark allocation will continue to be the ECB’s capital key. Purchases will be made flexibly according to demand.

There is a special arrangement for Greece to enable higher purchases.

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Expanding the range of eligible assets to short-term debt securities of non-financial companies.

The expansion of the purchase programme for corporate bonds to include non-financial commercial papers, i.e. short-term debt securities of the real economy, is particularly significant. This will ensure that refinancing can be safeguarded more easily.

▪

Easing of collateral standards. The standards for loan collateral for the lending regulations of commercial banks will be eased to safeguard refinancing.

This package of measures is designed to secure the financing of all customer groups in the current crisis through the banking system. The ECB can use this to tackle the liquidity shortages in government and corporate bonds, in short-term debt securities and in certain other market segments in a targeted manner by assuming a buyer role and maintaining market liquidity. The repeated indication that these measures can also be expanded if necessary is also meant to avoid panic responses on the markets.

Unlike in the large financial and economic crisis in 2007, the ECB has used maximum firepower from the beginning to keep the cost of the measures as low as possible. This is exactly the lesson learnt from the last crisis. The ECB further clarified on 24 March that it will not allow disruptions in the transmission of monetary policy in times of the pandemic and is therefore lifting the normal thresholds of the purchasing programmes for the PEPP (ECB 2020).

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Countermeasures of the U.S. central bank The Federal Reserve decided on several relief packages in March encompassing a number of very important support measures for the U.S. economy. On 15 March, the Fed cut key interest rates further to a range of zero to 0.25 percent. This came after a 50 basis points cut in the key interest rate at the beginning of March. Also on 15 March, the rate of emergency lending at the discount window for banks was slashed by 150 basis points, down to 0.25 percent, a measure which has been proving helpful since then. The Fed also initiated a new asset purchase programme with a volume of 700 billion U.S. dollars and has lowered the reserve requirements for banks. In several small steps in the middle of March, the Fed also renewed the refinancing facilities for money market funds, for short-term debt securities in the corporate sector and for primary dealers to counter liquidity shortages in these market segments.

In a third step on 23 March, the Fed again took action by announcing that it would purchase Treasury securities and agency mortgage-backed securities in the amounts needed to ensure smooth market functioning. It expanded the group of eligible assets to include agency commercial mortgage-backed securities and extended the range of securities that can be purchased through monetary and primary facilities. The Fed also resumed the ABS purchase programme from times of crisis and newly introduced a secondary market programme for corporate bonds. The new programme components could reach a volume of up to 300 billion U.S. dollars, according to the Fed. Additional measures were decided in early April.

The Bank of England The Bank of England has responded to the current crisis with a massive programme. On 11 March 2020 interest rates were cut from 0.75 percent down to 0.25 percent and again, on 19 March, down to 0.1 percent. In addition, the asset purchase programme of quantitative easing was resumed with a volume of 200 billion pounds (equivalent to nine percent of GDP) including a term funding scheme for SMEs (TFSME). The TFSME is designed to enable corporate financing at interest rates customary on the capital markets and to relieve bank balance sheets of increased risks.

For larger companies, the 330-billion-pound credit programme Covid Corporate Financing Facility, CCFF, was set up in conjunction with the finance ministry to bridge disruptions in liquidity. The CCFF authorises the Bank of England to purchase newly issued commercial papers. The funds are designed to enable healthy companies to pay operating expenses (especially salaries). Companies that want to issue commercial papers for the first time are also eligible. The term of the programme is twelve months. On top of this, the countercyclical capital buffer was lowered down to zero and supervisory guidance was issued not to increase dividends or bonus payments.

Coordinated action: Swap agreement to secure dollar liquidity The swap agreement used during the last crisis to provide dollar liquidity was renewed and given favourable conditions. The agreement was concluded by the central banks of Canada, Japan, the United Kingdom, Switzerland and the ECB. This was an important step to securing dollar liquidity outside the United States.

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G7 and G20 On 24 March the finance ministers and central bank governors of the G7 countries presented a statement committing to do whatever necessary to restore confidence and economic growth, as well as to protect jobs, businesses, and the resilience of the financial system. The central banks of the G7 countries intend to maintain their expansive monetary policy for as long as needed. If required, they will initiate further measures consistent with their mandate. The G7 ministers also pledged to support the international financial institutions with flexible and timely policy advice, technical assistance, and emergency financing. The G7 foreign ministers were less successful in their meeting on 25 March, which ended without a joint statement. The foreign ministers of Germany and the United Kingdom presented a joint paper that will serve as a basis for talks on coordinated action going forward, with a focus on international collaboration in the development and provision of medication and vaccines, but also on supporting those countries least equipped to fight this crisis. On the basis of the pandemic, President Trump cancelled the G7 summit for 2020.

On 26 March, the heads of state and government of the G20 declared that they would take all necessary steps and use all policy instruments available to keep the economic and social damage of the pandemic as low as possible, restore global growth, maintain the stability of the markets and increase resilience.

▪

The G20 pledged, together with the World Health Organisation (WHO), the International Monetary Fund, the World Bank Group, the United Nations (UN) and other international organisations, to take all necessary steps that are consistent with their mandate to overcome the pandemic.

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Targeted financial policy and economic measures and guarantees will be used to invest more than five trillion dollars into the global economy in order to counter the social, economic and financial impact of the pandemic.

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The G20 seek to expand production capacities to meet the growing demand for medical equipment and devices.

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The G20 are committed to ensuring that these goods are made available as quickly as possible where they are most needed, on an equitable basis and at affordable prices.

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The G20 pledged to collaborate further to facilitate international trade and to coordinate responses in order to avoid unnecessary interventions in the international transport and trade. They reiterated their goal to realise a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment and to keep markets open.

The IMF: Emergency financial assistance available to developing countries The global shock waves of the pandemic have meanwhile reached emerging and developing countries.

A few of these countries are also directly affected by the pandemic. In all cases, the international community must expect to see rapid capital outflows from portfolio investors that can lead to currency, financial and banking crises and upheavals in the real economy. In late March, almost 100 billion U.S. dollars had been taken out of developing countries within a very short space of time, which is a very high figure.

The IMF therefore indicated early on that it can mobilise programme loans and issued recommendations for measures aimed at financial stability. The IMF recommends that central banks

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keep all channels of liquidity provision open, stabilise demand through interest rate cuts, purchase programmes and management of expectations, that governments protect affected industries and households with financial policy measures, and that international collaboration on healthcare and economic issues is taken into account. Banks should also be able to use capital conservation and countercyclical capital buffers, renegotiate credit agreements with debtors in emergency situations and be supported by governments with guarantees, purchase programmes, and, if not available, through guarantees for capital contributions (IMF 2020).

The IMF has an overall lending capacity of well over one trillion U.S. dollars. It can easily grant 10 billion U.S. dollars to the poorest countries as an emergency measure without complex programme conditions (up to half of the member states’ quota). For countries with a higher per capita income a further 40 billion U.S. dollars of potential financing would be available. The IMF currently has 40 active programmes. Seventy governments have approached the IMF so far with programme wishes totalling 50 billion U.S. dollars. These calls can be responded to quickly within existing programmes and certainly also with new governments following the conclusion of a programme (Georgieva 2020).

Conclusion The first economic, financial and monetary policy responses to the pandemic in the first weeks were only taken by the world’s large central banks with a minimum degree of international coordination. Most governments only took a few weeks to respond to the massive consequences to public health and economic policy. At some points, the internal market even suffered from a one-sided closure of borders.

The conditions for freight traffic are now more clearly oriented again to the internal market.

International coordination in Europe, above all in the euro area, but also in the G7 and the G20 has also now begun.

That being said, two issues in particular remain unresolved. First, it is not yet clear whether the economic policy measures adopted to support companies will be sufficient or whether a wave of bankruptcies will wash over the business sector. This will also determine the extent of the impact on the labour market. The provision of emergency liquidity by governments and indirectly by the central banks and the banking system must be swift and of a high volume in the case of stringent quarantine measures. This is primarily a practical problem especially if credit review processes cannot be circumvented in full and liquidity is provided by the treasury and tax policy decisions. Hardly any country has taken this step so far but it definitely remains an option that can be taken.

The second point is international collaboration in many areas. In Europe, instruments are already available that enable coordinated action but not all conceivable ones. In view of the massive public health problems in Italy and Spain, the stringent quarantine measures over a comparably long period of time, and the difficult prospects for public finances in the medium term once the pandemic has been overcome, stronger common solutions will have to be found than in the past. It remains to be seen whether the political institutions of the EU can shoulder this enormous task. We are now paying the price two or threefold for failing to deepen the Economic and Monetary Union while the going was good.

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Coronavirus Shock for Global Economy | Financial and Economic Policy in the Recession 16/04/2020

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Authors Dr. Klaus Günter Deutsch T: +49 30 2028 1591 k.deutsch@bdi.eu

Valerie Ross T: +49 30 2028 1623 v.ross@bdi.eu

Stefan Gätzner BDI-Vertretung, Peking T: +86 1085 322862 s.gaetzner@bdi.eu

Dr. Christoph Sprich T: +49 30 2028 1525 c.sprich@bdi.eu

Thomas Hüne T: +49 30 2028 1592 t.huene@bdi.eu

Katherine Tepper T: +49 30 2028 1499 k.tepper@bdi.eu

Solveigh Jäger T.: +49 30 2028 1533 s.jaeger@bdi.eu

Editorial/Graphics

Lennart Jansen T.: +49 30 2028 1483 l.jansen@bdi.eu

Marta Gancarek T: +49 30 2028 1588 m.gancarek@bdi.eu

Wolfgang Krieger BDI-Vertretung, Peking T: +86 1085 3258421 w.krieger@bdi.eu Paul Maeser T: +49 30 2028 1545 p.maeser@bdi.eu Dr. Stormy-Annika Mildner T.: +49 30 2028 1562 s.mildner@bdi.eu Corinna Neumann T: +49 30 2028 1749 c.neumann@bdi.eu Miriam Philipp T: +49 30 2028 1700 m.philipp@bdi.eu

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