BlackRock Investment Institute

Macro insights

Responding to the
coronavirus shock

We have downgraded our view of global growth due to the impact of the coronavirus outbreak. The immediate hit to growth is likely to be sharp enough to bring some developed markets—such as Japan and the euro area – to the brink of a technical recession. But we do not expect a global or U.S. recession. Central banks have begun to respond with rate cuts – yet in our view both monetary and fiscal policies will be necessary to support the global economy.

BlackRock Financial Conditions Indicator for U.S., Japan, euro area, 2016-2020

Sources: BlackRock Investment Institute and Bloomberg, March, 2020. Notes: This chart shows the rate of G3 GDP growth implied by our financial conditions indicators (FCI), based on its historical relationship with our Growth GPS. The FCI inputs include policy rates, bond yields, corporate bond spreads, equity market valuations and exchange rates. Forward-looking estimates may not come to pass.

Global financial conditions have tightened, despite a pronounced drop in sovereign bond yields. See the chart above. This threatens a crucial prop to growth that helped cushion last year’s slowdown. In response to this, the Federal Reserve surprised markets with a 50 basis-point rate cut ahead of its scheduled March meeting, with Fed Chair Jerome Powell citing tighter financial conditions as a factor in the surprise move. Other major central banks – such as the Bank of England and European Central Bank – have issued statements indicating that they are ready to act if needed. 

But the space to cut rates is limited in some economies — such as Japan and the euro area. And rate cuts are only one part of the policy toolkit. Central banks could use a broader package of measures, including asset purchases, and other actions to provide liquidity to financial markets and to small and medium-sized enterprises as well as using central bank swap lines to ensure U.S. dollar funding is available.

Fiscal policy is also likely to be an important part of the policy response, especially public health spending and income support for people temporarily off work. And governments could provide targeted relief, such as temporarily suspending tax payments, to the hardest hit industries and regions.

We will be watching closely for signs of a liquidity crunch or deterioration in financial conditions. Small and medium-sized enterprises are most susceptible to a cash flow crunch if the outbreak endures and they start to run out of working capital. Forbearance measures might help to cushion the impact, such as banks being encouraged to defer loan interest payments or central banks offering banks special lending facilities against a wider array of collateral.

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