The Economist USA 03.21.2020

20 BriefingThe pandemic The EconomistMarch 21st 2020

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ly February but is now the best (or rather,

least bad). There remains, however, a risk

that global containment and suppression

of the virus will need to continue for a year

or longer. If so, global economic output

could be dragged down for much longer

than most people expect.

Perhaps the greatest lesson of the global

financial crisis was that it paid to act deci-

sively and to act big, convincing markets

and households that policymakers were

serious about countering the slump. If

done right, central banks and governments

can end up doing a lot less than they actual-

ly promised. A pledge to bail out banks

makes it less likely savers will withdraw

deposits and make a rescue necessary.

This time around, central banks sprang

into action. Since February the Federal Re-

serve has cut interest rates by 1.5 percent-

age points. Other central banks have fol-

lowed suit. Further deep rate cuts are not

possible, though; interest rates were very

low long before the virus began to spread.

Let’s get fiscal

Not all central banks are acting as boldly as

they can. China has room to cut interest

rates—its benchmark rate is 1.5%—but has

held back in part because inflation is quite

high (largely as a result of African swine fe-

ver, which hit pig stocks, raising prices).

Central banks could try more creative poli-

cies. On March 19th the ecb’s governing

council agreed to launch a €750bn bond-

buying programme, covering both sover-

eign and corporate debt. But the real action

is now taking place on the fiscal front.

Governments are falling over each other

to offer bigger and better stimulus pack-

ages. All countries are spending more on

health care, both in an effort to find vac-

cines and cures and to increase hospital ca-

pacity. However, the bulk of the extra

spending is on companies and people.

Take companies first. China, where the

outbreak has slowed, is now trying to get

people out and buying things. Foshan, a

city in Guangdong province, has launched

a subsidy programme for people buying

cars. Some cities have started giving out

coupons that can be spent in local shops

and restaurants. Nanjing this month gave

out e-vouchers worth 318m yuan ($45m).

Most countries, however, are in or

about to enter the worst part of the out-

break. As customers dry up, many firms

will go bust without government help. Cal-

culations by The Economist suggest that

40% of consumer spending in advanced

economies is vulnerable to people shun-

ning social situations. Firms in leisure and

hospitality are especially rattled. The Moor

of Rannoch hotel, in about as rural a part of

Scotland as it is possible to find, says its in-

surer will not be paying out a penny for lost

custom, since covid-19 is a new disease and

thus not covered under its policy.

One approach is to reduce firms’ fixed

costs, largely rent and labour. China’s fi-

nance ministry will exempt companies

from making social-security contributions

for up to five months. The government has

also temporarily cut the electricity price for

most companies by 5% and enacted short-

term value-added-tax cuts. The British gov-

ernment has extended a one-year busi-

ness-rates holiday to all companies operat-

ing in the retail, hospitality and leisure

sectors. Yet for many firms, no matter how

much the government helps them reduce

costs, revenues are likely to fall further.

So measures may be needed to allow

firms to maintain cashflow. Many banks

are offering hefty overdrafts to tide cor-

porate clients over. To encourage banks to

keep lending, Britain has promised them

cheap funding and state guarantees against

losses. For very small firms, many of which

do not borrow at all, it is offering non-re-

payable cash grants of up to £25,000.

Other countries are enacting similar

plans. The Japanese government is helping

small firms by mobilising its state-owned

lenders to provide up to ¥1.6trn of emer-

gency loans, much of it free of interest and

collateral requirements. Small firms quali-

fy for help if their monthly sales fall at least

15% below a normal month’s takings. Ba-

varia, a rich state in Germany, announced

on March 16th that small and medium-

sized companies with up to 250 employees

could receive an immediate cash injection

of between €5,000 and €30,000. The Euro-

pean Commission has already relaxed

state-aid rules so that governments can

channel help to ailing companies.

The second part of the fiscal response is

about helping people, and in particular

protecting them from being made unem-

ployed or suffering a drastic drop in in-

come if that does happen. Ugo Gentilini of

the World Bank counts more than 25 coun-

tries that are using cash transfers as part of

their economic response to the virus. Bra-

zil will give informal workers, who make

up roughly 40% of the labour force, 200

reais ($38) each. Small businesses will be

allowed to delay tax payments and pen-

sioners will get year-end benefits early.

Australia is instituting a one-time cash

payment of A$750 ($434) to pensioners,

veterans and people on low incomes.

Northern Europe has led the way on im-

plementing policies that make it less likely

firms lay off workers. Germany has relaxed

the criteria for Kurzarbeit (“short-time

work”), under which the state pays 60-67%

of the forgone wages of employees whose

hours are reduced by struggling firms. Ap-

plications are going “through the roof”, ac-

cording to the federal labour agency. The

use of Kurzarbeitprobably halved the rise

in unemployment during the recession of

2008-09. More firms are now eligible to use

it, temporary workers are covered, and the

government will also reimburse the social-

security contributions companies make on

behalf of affected workers.

Bringing home the Danish bacon

In Denmark firms that risk losing 30% or

more of their workforce will see the gov-

ernment pay 75% of the wages of employ-

ees who would otherwise be laid off, until

June. Norway’s government has beefed up

unemployment benefits, guaranteeing

laid-off workers the equivalent of their full

salary for the first 20 days. Freelancers

whose work vanishes for more than a fort-

night will get payments equivalent to 80%

of their previous average income. In Swe-

den the state will cover half of the income

of workers who have been let go, with em-

ployers asked to cover most of the rest.

So far America has passed more modest

legislation. Federal funding for Medicaid,

which provides health care for the poor, is

likely to boost spending by about $30bn,

assuming it remains in place until the end

of December, reckons Oxford Economics, a

consultancy. America also has a new paid-

sick-leave policy for some 30m workers, in-

cluding 10m who are self-employed, worth

just over $100bn. But in that regard Ameri-

ca is merely catching up with other rich

countries, which have far more generous

sick-leave policies. America also has fewer

Big-screen bust^2

Source:GoldmanSachs

Weekend cinema box-office revenue

%changeona yearearlier

Jan Feb Mar

2020

0

25

50

Rest of Asia

China

United States

Estimate

Japan

Europe

The outlook mutates^1

Source:DeutscheBank

*WeightedaverageofEuroarea,US,

ChinaandJapan †Annualised

WorldGDP*,%changeonpreviousquarter†

2019 20 21

0

5

10

Feb 5th baseline

Mar 2nd

baseline

Mar 18th baseline

FORECAST

Pre virus