The coronavirus (Covid-19) pandemic will have a huge and lasting negative effect on the global economy; 2020 and 2021 will be lost years in terms of growth, and we expect the global economy to recover to pre-coronavirus levels only in 2022. The pandemic will also place a heavy fiscal burden in both developed and developing countries.
Many developed countries will take years to recover to pre-coronavirus GDP levels. To boost growth, governments are resorting to massive fiscal stimulus packages.
The US government passed two emergency relief bills at the start of the crisis, worth nearly US$3trn. Some of the landmark elements of these bills have been extended, for example, the Paycheck Protection Programme (PPP), which will continue to offer forgivable loans to small businesses from the original pool of funding. However, others, including supplementary unemployment benefits of US$600/week, lapsed at end-July, when the programme expired.
At the time of writing Republicans and Democrats have yet to reach consensus on the next round of stimulus. Democrats have passed a US$3trn bill in the House of Representatives, which will extend the extra unemployment benefits and boost funding to state governments. However, Republicans have proposed a much thinner bill (about US$1trn) that would reduce unemployment benefits to US$200/week or 70% of previous earnings. We ultimately expect a compromise to be reached, most likely with reduced benefits.
As a result of these massive fiscal stimulus packages, we forecast that the federal fiscal deficit will reach nearly 16% of GDP in 2020, a record high, as the government boosts emergency spending and fiscal receipts are slashed. This will put US public debt on a more unsustainable path than ever before.
In July EU leaders agreed on a European economic recovery fund for 2021-24, involving unprecedented joint debt issuance (worth €750bn, or US$888.2bn), to be channelled to the less developed economies in the bloc and those hardest hit by the pandemic. About €390bn will be transferred as grants and €360bn through loans. The size of the fund is modest compared with those provided by some national governments, and the negotiations exacerbated tensions with fiscally hawkish member states; however, the agreement on an EU fiscal stabilisation tool is a landmark step for the bloc.
Adoption of the EU recovery fund sends an important signal of solidarity to the countries hardest hit by the pandemic and provides an antidote to anti-EU sentiment, which has risen recently in the south. It also sends a signal to markets that the European Central Bank (ECB) will not be left to manage the crisis alone, reducing peripheral bond spreads and offsetting fears of financial fragmentation. The overall size of the fund is small compared with sums spent by national governments, but helpful for indebted peripheral countries with limited fiscal space. The adoption of the fund has also assuaged concerns about risks of sovereign-debt crises in south European states such as Italy.
Compared with those seen in North America and Europe, fiscal stimulus packages have been modest across Asia. For the region as a whole, total fiscal spending will eventually amount to US$3trn. Factoring in a challenging year for economic growth and the likelihood that not all of this spending will be on budget (especially in the case of China), this will push the regional aggregate budget deficit ratio above 5%, which will, in turn, fuel public debt ratios.
The Asia-Pacific region is better placed than others to manage the fiscal impact of the coronavirus crisis. Most governments entered the crisis with sustainable public debt burdens (although in some economies, notably China and India, off-budget liabilities represent a non-negligible risk). However, the need to focus on domestic challenges will affect the capacity and appetite of the region’s heavyweights for foreign investment in 2020. We expect China to deprioritise overseas lending, trade and investment under the Belt and Road Initiative (BRI) in the immediate term, which will have an impact across poorer BRI recipients.
Multilateral financial institutions, together with the world’s wealthiest countries, have offered substantial financial support to help to ease the financial burden on low-income and emerging-market economies in Africa, the Middle East and Latin America. The IMF and the World Bank have ramped up emergency funding, debt relief is on the agenda and the G20 is offering financial support by suspending debt repayments. These efforts will give the world’s poorer countries some short-term breathing space, as well as freeing up resources for them to beef up healthcare spending and implement economic stimulus programmes. However, most new funding (albeit on concessional terms) will be added to the balance sheets of emerging economies, raising the risk of sovereign-debt crises in the medium term.
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