Washington’s US$2-trillion gusher of aid for its virus-plagued economy is massive, sweeping and unprecedented in scope. But it is not enough, by itself, to ensure a strong global recovery.
What the new package does offer is reassuring proof that Congressional leaders will come together and do what is necessary to support their domestic economy, even in an age of hyperpartisanship.
In part, the willingness of Republicans and Democrats to strike a deal after just a few days of negotiation is a recognition of the new reality that the novel coronavirus has created. Never before has an emergency slammed the brakes on the global economy so quickly or so completely.
Governments everywhere have no realistic option other than to spend what is necessary to cushion the economic shock and prevent a widening spiral of failed businesses, laid-off workers and insolvent consumers.
The amount of money needed to do this is head-spinning. Back in 2008 and 2009, countries in the developed world deployed fiscal stimulus equivalent to 3.6 per cent to 5.5 per cent of their national output, according to Eric Lascelles of RBC Global Asset Management.
By comparison, the package agreed to by U.S. Congressional leaders in the early hours of Wednesday morning is equivalent to nearly 10 per cent of U.S. gross domestic product.
Similarly sized relief efforts are quickly becoming the new normal. Germany, usually a beacon of fiscal prudence, is rushing forward with emergency measures, including a bailout fund for critical industries and loan guarantees, which will also amount to nearly 10 per cent of its GDP. For its part, Britain has unveiled a raft of virus-inspired measures that is likely to carry its deficit above 10 per cent of GDP, although not all of that deficit will be the direct result of the virus outbreak.
For now, Canada is lagging those pace setters. It is relying heavily on tax deferrals to help consumers and businesses over the next few months. But even counting those temporary tax deferrals, Ottawa’s entire relief package amounts to just about 3.6 per cent of GDP. That is likely to change in coming days, as Canada and other countries supersize their own efforts.
That raises a key question: How much in relief spending is appropriate?
A rough-and-ready approach to calculating the necessary amounts is to assume that every dollar of relief spending offsets a dollar of demand that has been lost because of virus-containment measures. If so, the size of the relief should be similar to the projected hit to GDP.
Many private-sector forecasters, including Goldman Sachs and Capital Economics, see U.S. economic activity plummeting in the second quarter at between a 24-per-cent and 40-per-cent annualized rate. If the economy bounces back in the third quarter, but most of the lost activity from the second quarter remains lost forever, then output for the full year is on track to decline by between 6 per cent and 10 per cent.
This makes the size of the U.S. stimulus package look entirely appropriate. It is enough to offset a quarter – maybe even two – of virus-induced losses to output, especially if you count on a multiplier effect that will enhance the effect of government stimulus efforts by encouraging private spending.
Since nearly all forecasters expect the virus to be contained by the end of summer, the U.S. package has gone a long way to calming fears of a longer-lasting downturn. Stocks have soared and for good reason.
The problem is that a financial solution can’t fix the underlying public health problem. So long as the number of new virus cases keeps expanding, markets are likely to remain nervous. If overwhelmed medical systems fail to keep up with the virus, sentiment could quickly shift.
The most obvious threat to a good outcome would be a move to end lockdowns prematurely. That might allow the virus to surge back and extend the downturn. Unfortunately, U.S. President Donald Trump appears to be mulling such an early exit from containment.
As powerful and as welcome as the U.S. stimulus package may be, it doesn’t guarantee an end to this slump. What is still needed is evidence of a decisive victory in the medical battle.
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