Governments globally ramp up response to pandemic - Raiz Invest

Raiz market and economic update

30-03-20

From George Lucas, Raiz CEO

 

Governments globally ramp up response to pandemic

Over the last week we have witnessed the roll-out of government stimulus packages around the world aimed at supporting the global economy amid the COVID-19 pandemic.

Health impacts aside, governments are currently facing an economic emergency larger than the 2008 global financial crisis. Unlike that crisis, where banks stop dealing with other banks, COVID-19 has caused corporates to stop dealing with other corporates in a large and unexpected way.

Given the gravity of the crisis, government responses have been both on the fiscal and monetary sides, with the fiscal policies being slower to be enacted as some have been delayed by politics of the day.

 

Trump approves US$2 trillion stimulus package

In the US, President Donald Trump signed the largest stimulus package in that nation’s history, approving a US$2 trillion bill intended to buoy the coronavirus-hit economy where the number of cases continues to rise.

Despite the package, worth over 10 per cent of their GDP, it will not be enough to stop a sharp fall in US economic growth in coming months as the restrictions being imposed mean that fewer people will be on the streets buying essentials items or spending on entertainment or luxury goods.

On the monetary policy side, the US Federal Reserve also announced unlimited support for the US treasury market and the purchase of corporate bonds.  This too is their largest response to an emergency.

 

Australia announces major stimulus packages

In Australia, it’s a similar situation as the federal government tries to insulate the domestic economy from the worst impacts of the pandemic.

The Morrison Government has announced two major stimulus packages, worth around AUD$189 billion.

In total, the Australian stimulus package is in line with other global governments — almost 10 per cent of GDP — and there will be more to come aimed at ensuring businesses can resume trade quickly and re-employ workers when the crisis resolves.

Elsewhere, Japan is also planning a stimulus package of around 10 per cent of GDP with details yet to be finalised. This is the same in Europe where nations are still working through the politics.

 

The global economy

Globally, the biggest problem faced by all economies is that while coronavirus restrictions remain in place people are not doing business with shops, shops are not doing business with suppliers, and suppliers are not doing business with other companies.

This is known as the velocity of money, which describes the rate at which money is exchanged in an economy. The challenge right now is that the velocity of money in economies worldwide has fallen off a cliff and will not come back until the restrictions are removed.

So, despite fiscal and monetary stimulus, we all must prepare for a drop in GDP over the coming months due to layoffs, huge reductions in revenue for companies, and the shutting down of many companies.

Stimulus plans, both monetary and fiscal, take time to work and stabilise markets. It is not an instant cure. Although it may not be until next week, or next month, that they begin to work, governments are now in the process of doing all they can to ensure that the global economy can weather the current crisis, and recover as quickly as possible when it ends.

 


 

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