If the Bank of England is going to build on the unprecedented policy support it has unleashed in recent weeks to counteract the economic effects of the coronavirus, it won’t be because of concerns over how far inflation or GDP will fall. Instead, it would …
26th March 2020
Euro-zone policymakers’ plan to offer precautionary credit lines to some governments is a step in the right direction, but it is too small and not the best tool for the job. It stops well short of fully mutualising the cost of dealing with the virus – …
In this Update , we answer some key questions about the fiscal stimulus underway in advanced economies. In short, government deficits are set to soar, probably rising by more than after the financial crisis. This is not an immediate problem, given that …
Tokyo Governor Yuriko Koike is mulling a lockdown for the capital in response to a rise in coronavirus cases. Taking into account the composition of Tokyo’s economy, we estimate that a lockdown in the capital would reduce national output by 5% for as long …
A surge in the unemployment rate to 12% in the second quarter will put upward pressure on the mortgage delinquency rate, but an additional $600 week in unemployment insurance should keep the rate under 7%. Moreover, given the temporary nature of the …
25th March 2020
The coronavirus crisis means that the government’s budget deficit will soon explode to above the 10% of GDP peak seen in the financial crisis and debt could spiral from about 80% of GDP now to over 100%. However, if we are right in thinking that the …
It now seems likely that euro-zone policymakers will exploit the European Stability Mechanism’s lending capacity to offer financial help to all member states to tackle the hit from the coronavirus. This should be fairly easy to do, but on its own it is …
Several producers outside China have reduced operations in the past week, most notably in Latin America. But much like policy support, lower supply will do little to boost prices so long as measures to contain the coronavirus keep demand comatose. In any …
Mexico’s economy is likely to suffer a similar fall in output this year as it did during the Tequila Crisis and the Global Financial Crisis. Despite its reticence, the government will ultimately have to do much more to prevent this from causing a sharp …
Stockpiling and labour shortages associated with the coronavirus have supported the prices of some agricultural commodities, particularly the grains, in recent weeks. However, once the virus-related containment measures are lifted, we think that their …
The economic hit from the coronavirus will cool rental demand, while social distancing measures will tip market dynamics in favour of renters. We have downgraded our forecast for rents and now expect them to fall by 1% this year. But rents should recover …
The UK’s current account deficit is the main reason why the pound has fallen by more than other currencies against the US dollar over the past fortnight. The same was true in the Global Financial Crisis, and the pound never really recovered. But the pound …
With the number of COVID-19 cases in the US skyrocketing and a rising share of the population under lockdown, we need to revise our macro forecasts quite significantly: We now expect second-quarter real GDP to fall at a 40% annualised pace, with …
Governments across the Middle East and North Africa have taken increasingly draconian steps over the past couple of weeks to contain the coronavirus outbreak and, as a result, there will be much more economic damage than we had previously thought. We now …
The measures to contain the spread of the coronavirus announced by PM Modi last night will be hard to fully implement but will still have severe economic repercussions. We now expect the economy to grow by just 1% this year, the weakest pace of annual …
The $2trn stimulus package agreed by Congress will include a permanent fiscal expansion worth up to 5% of GDP and, in conjunction with the new lending facilities announced by the Fed, could channel up to $6trn in temporary financing to consumers and firms …
The ban on home auctions and open house viewings will probably result in lower home sales and there’s a growing risk that the government will ban the buying and selling of real estate altogether. Even once restrictions to prevent the spread of coronavirus …
The complete shutdown of large parts of the economy suggests that GDP will plunge by 35% annualised in the second quarter and that the unemployment rate will climb to near 15% in the coming months. Service sector firms including restaurants, gyms and …
24th March 2020
Fire sales of gold have seemingly given way to safe-haven buying following yesterday’s unprecedented intervention by the Federal Reserve. Providing the Fed has injected sufficient liquidity to defend against a further collapse in equity prices, we expect …
President Cyril Ramaphosa’s decision to emulate the lockdowns seen in Europe and East Asia will cause GDP to fall by 6-8% in Q2. It will also be the first real test of whether such policies can be implemented effectively in low income countries. The South …
The enormous fall in GDP that we have pencilled in for Q2 as a result of the economic effects of the coronavirus implies that the unemployment rate will spike over the next few months and that incomes will be hit hard. However, the short duration of the …
We think the unemployment rate in the euro-zone will surge to about 12% by the end of June, giving up seven years’ worth of gains in a matter of months. Much of this may prove temporary if the economy rebounds in the second half of the year, as we assume, …
Hungary’s central bank announced a range of measures to increase liquidity in the banking system at today’s MPC meeting. But the economic effects of the coronavirus are likely to be much more damaging than policymakers currently think, suggesting that …
The dislocation in global financial markets has led to large capital outflows from EM debt and equity markets, which has caused financial conditions to tighten. And the economic effects could be much more damaging if major banks start to cut back exposure …
While we think that most currencies will eventually regain much of the ground that they have recently lost to the US dollar, we don’t expect that process to start until the pandemic has clearly passed its worst . The US dollar has strengthened this year …
On current trends the extreme shock to China’s economic output caused by official closing of workplaces and limits on movement will mostly have ended by mid-April. But firm closures and job losses, lingering nervousness among consumers, and the deepening …
The March Flash PMIs for advanced economies were dreadful. The composite PMI for DMs plummeted to a level just shy of its all-time low. With the lockdowns only getting underway, worse will come in April. Today’s batch of PMIs all but confirm that advanced …
A record number of sovereign dollar bonds are now trading at distressed levels, although these are mostly those of smaller EM governments. Among the most highly distressed sovereigns, Zambia and Ecuador are most likely to default in the very near term. …
The slump in domestic and external demand as a result of the coronavirus outbreak means that we now expect the Russian economy to contract sharply this year. Despite its recent reluctance we expect the central bank to cut interest rates before long and …
With the global coronavirus pandemic set to last for months, it now looks almost certain that this summer’s Tokyo Olympics will be postponed. The impact on the economy this year of such a move should be small. Moreover, Japan is still likely to reap the …
The slump in the rupiah poses a major threat to Indonesia because of the country’s high level of foreign currency debt. So far, the response of the central bank has been to step up its intervention in foreign exchange markets, but if the decline in the …
This Update was originally sent to clients as a Rapid Response immediately after the Fed’s policy statement on 23 rd March. The Fed’s expansion of its open-ended QE, together with new measures to lend directly to firms shows the Fed is moving beyond …
While the price of Brent has dropped by nearly 60% since January, agricultural prices have so far held up comparatively well. Although we wouldn’t rule out agricultural prices falling further, the recent divergence in prices reveals that the relationship …
The number of confirmed coronavirus cases in India is now rising sharply and, in response, most states have implemented full or partial lockdowns. With many households likely to have very low savings buffers, the central government will urgently need to …
Countries across Emerging Europe have stepped up their efforts to contain the coronavirus outbreak over the past week or so and the economic damage will now be much more severe than we had previously thought. Output will decline sharply in Q2 and, even if …
23rd March 2020
The controlled devaluation of the naira will help to preserve Nigeria’s scarce FX reserves and encourage foreign investment inflows. Given, however, that officials opted to maintain a dual-track system, we expect that the FX regime will remain complex and …
Financial conditions in advanced economies are now almost as tight as they were in 2009. So far, this has been the result of an economic shock rather than strains within the financial system itself and hence financial conditions are posing less of an …
Germany’s supplementary budget for nearly 5% of GDP sets an example that other euro-zone countries are likely to follow. However, we suspect that the costs will end up being much higher even than this. Media reports indicate that the German government …
The slump in the prices of commodities has hit hard the currencies of the countries whose fortunes depend heavily on them. (See Chart 1.) But if we are right and commodity prices eventually recover as the coronavirus pandemic is brought under control, …
The cost of the coronavirus crisis could push Italy’s public debt ratio up to 160% of GDP or more in 2020. This shouldn’t spark a crisis this year because the ECB will stand behind the bond market, but unless the euro-zone agrees more collective support …
The turmoil in Latin American currency markets will push up inflation, particularly in Brazil, Mexico and Colombia, and it already appears to have resulted in strains in corporate bond markets. One consequence is that the region’s central banks may not be …
Foreign portfolio flows out of India’s markets have surged over the past month to more than double the peak during the “Taper Tantrum” in 2013, which pushed India to the brink of a balance of payments crisis. Higher foreign exchange reserves and a smaller …
New Zealand is set to enter a near-total lockdown this week which will cause economic activity to all but stop. The RBNZ launched quantitative easing today, but we think that more monetary stimulus will be needed. We expect the Bank to cut the OCR into …
Australia is moving closer to shutting down a large share of its services sector and we now expect GDP to fall by 4% this year. The government is responding with a second, larger fiscal stimulus package that should prevent the recession from turning into …
This Update was originally sent to clients as a Rapid Response immediately after Rishi Sunak’s press conference on 20 th March. The Chancellor’s announcement this afternoon means that the government’s coronavirus-fighting economic package is now worth …
20th March 2020
Over the last month, industrial metals prices had been holding up on hopes that China’s economy was edging closer to a post-virus recovery. But that all changed this week. With what were once downside risks now morphing into our central scenario, we have …
Earlier this week, the virus-related economic disruption and the prospect of a surge in OPEC+ supply pushed the Brent-WTI price spread near to zero. Although it has since rebounded, we think the spread will disappear by the end of this year. And by 2021, …
While the ECB’s extra €750bn in bond purchases has reduced financial market stress, governments also need to deliver a large fiscal response without triggering a fresh sovereign debt crisis. In our view, a good way to do so would be to adapt the ESM to …
