The Coronavirus Crisis: Is the Economic Policy Response Sufficient?

Last week’s events marked a turning point in the coronavirus crisis, with governments around the world announcing stringent measures to contain the spread of the virus. While the global supply chain had previously been impacted by the containment policies in China and South Korea, the ban on large gatherings has now spread to most, if not all, areas of the planet. The airline, tourism, restaurant and entertainment industries are grinding to a halt. Let’s face facts: this crisis may bring a recession. From an economic standpoint, the public-health measures inflict short-term pain in return for long-term gains. A business-as-usual approach would lead to much greater economic damage. However, these measures will have very serious impacts on many households and businesses, which will suddenly be deprived of income. This will have ripple effects on the financial system.

The current situation is different from the previous global crisis. The Great Recession of 2008–2009 originated from the financial system and spread to the real economy afterward. This one on the other hand originates from the real economy and has spread to the financial system. It bears certain similarities to the oil embargo crisis of 1973–1974, which inflicted a massive shock on the world real economy, as the price of oil quadrupled within weeks and the supply of gasoline was disrupted. We don’t know how long the current crisis will last. We don’t know how long the current epidemic containment measures will have to stay in place, or how long it will take before the number of infected people stops growing and reverses into a decline. We don’t know when life will return to normal. But one thing we can take away from history is that strong economic support measures, in addition to public health care measures, will likely help recovery occur earlier and limit the damage from the crisis.

This raises the question of whether the governments and central banks are currently responding strongly enough to the coronavirus crisis. The table below describes the monetary and fiscal stimulus packages that have been launched in response to the coronavirus crisis as of March 16, 2020:

Sources: Bank of Canada, U.S. Federal Reserve, European Central bank, Bloomberg

The evidence shows that central banks and governments are taking substantial policy measures to support the financial system and the real economy. These measures are just the beginning; more announcements are likely on the way.

History has demonstrated that modern economies can overcome economic crises when provided with timely and appropriate monetary and fiscal stimuli. We should nevertheless expect these to take time before progress starts to appear. At the current stage, in my opinion, the evidence suggests that the crisis in the economy and the stock market will likely be painful, but not disastrous, and that a substantial recovery will follow. Since the timing of this recovery is unknown, I believe the only reasonable course of action for long-term investors is to stay disciplined and stick to their investment plan.