Written on 26/03/2020 by Lukman Otunuga, Senior Research Analyst at FXTM
Over the past few weeks, central banks and governments have unleashed a wave of emergency measures to support their respective economies from the negative impacts of the coronavirus pandemic.
As monetary policy bazookas proved increasingly ineffective against the widening health crisis, central banks have taken unprecedented steps while governments unveiled handsome fiscal packages. It was only this week that the Federal Reserve detonated a monetary policy timebomb by pledging an open-ended unlimited quantitative easing program. This unprecedented move was later complemented by a $2 trillion US economic rescue package agreed by Senate Republicans and Democrats. In Europe, ECB made a historic announcement that there will be no limits to their QE program. Similar strategies were witnessed in the United Kingdom and across the world as global authorities stood together in the fight against COVID-19.
The narrative has constantly changed over the past few months from investors evaluating what a China slowdown means for the global economy, to concerns raised whether we are heading for a global recession. Now the question on the mind of many investors is how bad the recession will be in 2020?
The $2 trillion virus emergency stimulus package may provide a lifeline to the United States and ease financial conditions amid the pandemic outbreak. It may even result in less volatility across the board, but as history tells us that such a move may only offer short-term relief. At this point, the effectiveness of the emergency support measures remains in question as the duration of supply and demand disruptions caused by the outbreak is still unknown. These fears are being fanned by major institutions like the International Monetary Fund and Organization of Economic Corporation and Development who both expect the global economy to enter a recession this year.
As of today, there are more than 480,000 reported cases in close to 200 countries, with more than 22,000 deaths recorded. In a bid to slow the outbreak, many countries have closed their borders, travel restrictions are in place and nationwide lockdowns imposed. The efforts in containing the outbreak will most likely lead to a drop in consumption as households spend less.
The longer the pandemic lasts, the greater the damage it will have on the global economy and longer it will take for things to stabilize. Hopes of a V-shaped recovery which is defined as a period of time after a recession where the economy experiences a sharp rise back to the previous levels are rapidly fading. Speculation is mounting over a U-scenario which is when the economy stagnates and continue to decline for a period of time before finally recovering.
In the worst-case scenario, the world may experience an L-shaped recovery when there is steep decline in economic growth followed by slow recovery. This could happen if the combination of monetary and fiscal policies prove ineffective in countering the coronavirus with a cure acting as the only solution.
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