BlackRock Investment Institute

Macro insights

Bridging the coronavirus gap

The sudden stop in activity triggered by the coronavirus outbreak has been met with an unprecedented policy response around the world. But will it be enough to fill the gap left by the plunge in demand, incomes and cash flows? Our bottom line: policy execution is crucial. Major economies may still struggle to bridge the gap entirely – even with policy programs of a size not seen since World War II.

Economic impact of coronavirus shock and policy measures, 2020

Sources: BlackRock Investment Institute, central banks, finance ministries, Oxford University, Apple and Google, with data from Haver Analytics, May 2020. We took the sectors likely to be hit the hardest and assessed how severely each has been impacted. We consider that in some countries the lockdown has been more severe – measured using the University of Oxford’s Stringency index and mobility data from Apple and Google. The loss in output depends on the severity of the lockdown and the role of the affected sectors in the economy. We use these estimates of peak-to-trough output decline to approximate the impact on 2020 GDP (red bars). This analysis is subject to limitations. It does not account for stimulus measures. The dark yellow bars show the fiscal measures that have been announced translated into impact on GDP, using standard fiscal multipliers. The light yellow bars show direct lending to the private sector by central banks. The euro area (EA) has announced 500 billion euros in grants but we don’t expect those to be available until 2021.

We recently looked at the impact of the coronavirus shock on key sectors to gauge the likely effect on the whole economy. The chart above compares this assessment of national income loss to the size of the policy responses announced to date. The orange bars show the full-year hit to GDP from our sector-level bottom-up analysis, distinguishing between the initial impact on the most affected sectors (such as travel and leisure) and the broader impact on the whole economy due to spill-over effects (light orange bars). These range between nearly 10% to nearly 20% in terms of full-year GDP in 2020. These estimates don’t factor in any policy response because they are based on the sudden stop in production on the back of a surge in social distancing.

The dark yellow bars show the discretionary fiscal measures that have been announced translated into a comparable impact on GDP, using standard fiscal multipliers. In the U.S., this fiscal response more than covers the initial impact. But once we factor in the spillovers of the coronavirus shock to other sectors in the economy the fiscal policy response shows sizable shortfalls for all countries.

The situation improves when fiscal policies are combined with monetary policies. This is especially striking in the U.S., where the monetary and fiscal response has been coordinated to facilitate direct financing of the private sector by the Federal Reserve, including corporate lending and corporate debt purchases (light yellow bars). This direct lending in the U.S. is on a par with the discretionary fiscal boost, and based on current projections would comfortably exceed the hit to GDP.  In other countries the direct monetary injection is much smaller. All countries should consider clear guardrails as monetary policy enters uncharted waters, in our view.

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