The coronavirus has so far had health consequences for a relatively small number of people worldwide, and as of Tuesday afternoon, there were just 30 confirmed cases in Canada, several involving people who have already recovered. But the fear of the virus has had a much wider economic reach.
On Tuesday, the United States Federal Reserve cut its benchmark interest rate by half a percentage point. It was, at first blush, a puzzling move. The signs of economic slowdown caused by a fear of the virus are not likely to be amenable to treatment by an intravenous drip of lower borrowing costs.
If people are spending less money at the neighbourhood restaurant because they’re worried about infection, that’s not going to change when they learn that they can now save a few bucks by refinancing their mortgage.
However, the main value of the Fed’s move may be as a form of signalling that it and other key players have their hands on the wheel. Several hours before the Fed’s announcement, finance ministers and central bankers from the Group of Seven countries issued a statement saying they stood ready to act on the virus, and on the economic virus of recession.
“Given the potential impacts of COVID-19 on global growth,” said the statement, “we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks. Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy.”
Just words? Maybe. But they point in the right direction. There must be a concerted response to the health consequences of the coronavirus. And unless that response is flawless, there will need to be a cure for the economic fallout.
In Canada, there is the possibility of an epidemic that could be costly in dollars and lives. However, that’s a possibility, not an inevitability. This isn’t like a weather forecast. The choices that governments make will determine the shape of Canada’s epidemic heat map.
And the same goes for economic growth. The course of the coronavirus, and its impact on the economy, will be determined in large part by what steps governments take, or fail to take. The good news is that part of the cure for what ails us is money. And money has never been cheaper. Savers are offering it to borrowers at fire sale prices.
On Tuesday, the yield on the Government of Canada 30-year bond fell to just over 1.2 per cent, while the yield on the 10-year bond fell below 1 per cent. These are record low borrowing costs. They indicate deep worries about long-term economic growth, but there is a positive flip side.
Ottawa can borrow at well below the expected rate of inflation, with those rates locked in for decades. The cost will be extremely low; economists, such as former International Monetary Fund chief economist Olivier Blanchard, have argued that, in circumstances such as this, the true cost of the borrowing may be zero, or less than zero.
To fight any future recession, Ottawa has the fiscal ammunition to unleash a hefty fiscal stimulus.
But recession is a problem for another day, hopefully far in the future. Canada is not at the point where the federal finance minister needs to talk about how many additional tens of billions of borrowed dollars will need to be spent, immediately, to re-float the economy.
And the best way to ensure that Canada does not experience a coronavirus recession is to ensure that we do not have a mass spread of the illness. It means ensuring all preparations are fully resourced, and far ahead of the virus. That may call for immediate, emergency spending.
Are our public health authorities sufficiently staffed and resourced? Do we have enough screeners in places such as airports? Are our frequently understaffed and overcrowded hospitals ready? Do we need to immediately set up new facilities to quarantine and treat large numbers of patients, in the event the disease spreads widely?
Ottawa has the fiscal powder to finance the health system’s response, including by handing cash directly to the provinces. Again: Borrowed money has never been cheaper. Failing to spend now to contain the virus would be a case of obsessing over the pennies, and losing sight of the pounds.