BIZweek n°281 12 mar 2020
BIZweek n°281 12 mar 2020
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  • Parution : n°281 de 12 mar 2020

  • Périodicité : hebdomadaire

  • Editeur : Capital Publications Ltd

  • Format : (260 x 370) mm

  • Nombre de pages : 7

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JEUDI 12 MARS 2020 BIZWEEK ÉDITION 281 SPECIAL SERIES ON THE RESPONSE TO THE CORONAVIRUS Limiting the Economic Fallout of the Coronavirus with Large Targeted Policies The human costs of the coronavirus outbreak have risen at an alarming rate and the disease is spreading across more countries. The first priority is clearly to keep people as healthy and safe as possible. Countries can help by spending more to boost their health systems, including on personal protective equipment, screening, diagnostic tests, and additional hospital beds. Without a vaccine to stop the virus, countries have taken measures to limit its spread, like travel restrictions, temporary school closures, and quarantines. Such measures also buy valuable time to avoid overwhelming health systems. Economic fallout COVID-19's impact on China% economy Manufacturing and services activity have declined dramatically. Services appears to be much harder nit/han manufacturing. (Manufacturing rurchasing Managers'Index, seasonally adjusted, 50+= evpansion) 54 52 50 48 46 44 42 40 38 36. -1 2 GFC 111N1 Last year COVID-19 (Services Rirchasing Managers'Index, seasonahly adjusted, 501- = expansion) 60 55 50 45 40 35. 30 25 -1 2 GFC H1N1 Last year COVID-19 Sources.- Haver Analirlics ; and IMF staff calculations. Note  : The x-axis shows the months elapsed sine the indicated event, with t=0 the initial impact monttr. Specific start dates by event are  : COVID-19 = Coronevirus Disease 2019 (January, 2020), FI1N1 = Influenza A virus suhrtype H1 N1 (April, 2009), GFC = Global Financial Crisis (Septern ber, 2008), and I ast year = January 2019. INTERNATIONAL MON ETARY FUND POST SCRIPTUM This health crisis will have a significant economic fallout, reflecting shocks to supply and demand different from past crises. Substantial targeted policies are needed to support the economy through the epidemic, keeping intact the web of economic and financial relationships between workers and businesses, lenders and borrowers, and suppliers and end-users for activity to recover once the outbreak fades. The goal is to prevent a temporary crisis from permanently harming people and firms through job losses and bankruptcies The economic impact is already visible in the countries most affected by the outbreak. For example, in China, manufacturing and service sector activity declined dramatically in February. While the drop in manufacturing is comparable to the start of the global financial crisis, the decline in services appears larger this time—reflecting the large impact of social distancing. The global supply and demand for dry bulk shipping stocks such as building materials and commodities has also dropped similar to during the most acute phase of the global financial crisis, reflecting curtailed economic activity associated with the unprecedented containment effort. This drop was not seen in recent epidemics or after the 9/11 attacks. Shipping costs The shipping index shows a sharp drop in vessel leasing rates since the start of the COVID-19 outbreak. (Salut Dry Index, one month prier to start date = 1 ao) eci 1 te 130 100 40 —9/11 —SARI —GFC —H141 —CNO-19 Sources Haver Analylics, and IMF staff calculaiions. 0 Allah Note  : The x-axis shows the months elapsed snce the indicated event, with t=0 the initial impact mont Underlymg data are at d aily frequency. Specif c start dates by event are  : COVID-19 = Coronavirus Disease 2019 (January 11, 2020), H1N1 = Influenza A vl rus subtype I-11N1 (April 15, 2009), GFC = Global Finam al Crisis (Septernber 15, 2008), SARS = Severe acute respiratory syndrome (November 16, 2002), and 9/11= (September 11, 2001). INTERNATIONAL MONETARY FUND Supply and demand shocks 2 3 The coronavirus epidemic involves both supply and demand shocks. Business disruptions have lowered production, creating shocks to supply. And consumers’and businesses’reluctance to spend has lowered demand. On the supply side, there is a direct reduction in the supply of labour from unwell workers, from caregivers who have to take care of kids because of school closures, and sadly, from increased mortality. But an even larger effect on economic activity occurs because of efforts to contain the spread of the disease through lockdowns and quarantines, which lead to a drop in capacity utilization. In addition, firms that rely on supply chains may be unable to get the parts they need, whether domestically or internationally. For example, China is an important supplier of intermediate goods to the rest of the world, particularly in electronics, automobiles, and machinery and equipment. The disruption there is already having knock-on effects to downstream firms. Together, these disruptions contribute to a rise in business costs and constitute a negative productivity shock, reducing economic activity. Key link in global value chains China is a major supplier of intermediate goods to the rest of the world. (imports of intermediate gonds from China inrnanufacturing, percent of value addec) 16 12 a 11111111111 e\ca e ci'
JEUDI 12 MARS 2020 BIZWEEK ÉDITION 281 expect lower demand and reduce their spending and investment. In turn, this would exacerbate business closures and job losses. Responses of US stock prices Airline stock prices have been hit disproportionately. Ipercell -5 -IO -15.20 25 -39 -35.W590 Ail. CCMDI9 9/1 GPC Sources  : Bloomberg FinanceL.P. and IMF star'calculations Note  : Responses after 10 business days. Stading dates are February 20 2020 for CDVID-19, September 10 2091 for 9/11, and September 26 20-08 for the global 6nancial crisis (after virhich the SAP 590 experienced the deepest 10-day contraction). INTERNATIONAL MONETARY FUND Financial effects and spillovers As seen in recent days, borrowing costs can rise and financial conditions tighten, as banks suspect consumers and firms may be unable to repay their loans on a timely basis. Higher borrowing costs will expose financial vulnerabilities that have accumulated during years of low interest rates, leading to a heightened risk that debt cannot be rolled over. A reduction of credit could amplify the downturn arising POST SCRIPTUM from the supply and demand shocks. And when these shocks are synchronized across many countries, the effects can be further amplified through international trade and financial linkages, dampening global activity and pushing commodity prices down. Oil prices have fallen dramatically in recent weeks and are about 30 percent below their levels at the start of the year. Countries reliant on external financing could find themselves at risk of sudden stops and disorderly market conditions, possibly requiring foreign exchange intervention or temporary capital flow measures. Targeted economic policies are needed Considering that the economic fallout reflects particularly acute shocks in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to help affected households and businesses. Households and businesses hit by supply disruptions and a drop in demand could be targeted to receive cash transfers, wage subsidies, and tax relief, helping people to meet their needs and businesses to stay afloat. For example, among other measures, Italy has extended tax deadlines for companies in affected areas and broadened the wage supplementation fund to provide income support to laid-off workers, Korea has introduced wage subsidies for small merchants and increased allowances for homecare and job seekers, and China has temporarily waived social security contributions for businesses. For those laid off, unemployment insurance could be temporarily enhanced, by extending its duration, increasing benefits, or relaxing eligibility. Where paid sick and family leave is not among standard benefits, governments should consider funding it to allow unwell workers or their caregivers to stay home without fear of losing their jobs during the epidemic. Central banks should be ready to provide ample liquidity to banks and nonbank finance companies, particularly to those lending to small- and medium-sized enterprises, which may be less prepared to withstand a sharp disruption. Governments could offer temporary and targeted credit guarantees for the near-termliquidity needs of these firms. For example, Korea has expanded lending for business operations and loan guarantees for affected smalland medium-sized enterprises. Financial market regulators and supervisors could also encourage, on a temporary and time-bound basis, extensions of loan maturities. Broader monetary stimulus such as policy rate cuts or asset purchases can lift confidence and support financial markets if there is a marked risk of a sizable tightening in financial conditions (with actions by large central banks also generating favourable spillovers for vulnerable countries). Broad-based fiscal stimulus consistent with available fiscal space can help lift aggregate demand but would most likely be more effective when business operations begin to normalize. Considering the epidemic’s broad reach across many countries, the extensive cross-border economic linkages, as wellas the large confidence effects impacting economic activity and financial and commodity markets, the argument for a coordinated, international response is clear. The international community must help countries with limited health capacity avert a humanitarian disaster. The IMF stands ready to support vulnerable countries with different lending facilities, including through rapid-disbursing emergency financing, which could amountup to $50 billion for low-income and emerging market countries. 5 Source  : Gita Gopinath IMF Blog 9 March 2020

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