How COVID-19 has affected the world’s financial markets

The global response to the pandemic has varied enormously among countries, with little effectiveness from some in controlling macroeconomic conditions. The G20 can play a role in bringing markets back to full health, but greater focus is required

How effective has the United States been in countering the recession caused by COVID-19?

Both fiscal and monetary policy have eased the downturn and set the conditions for recovery. The Federal Reserve has gone to extreme lengths to ensure sufficient liquidity and provide purchase instruments to back up the financial markets. Congress has produced several small but additive packages of fiscal stimulus. Regulatory changes have allowed new approaches to joint private-sector, public-sector efforts on vaccine production. We’ve done more than we should have on the fiscal side. I’m concerned about the growth of fiscal stimulus across the G20.

What are the US prospects for next year?

Higher than today. The end of 2021 will be higher than the end of 2020, with 3–4% growth, assuming consistency in macroeconomic policies.

My advice to government is steady as she goes. Some input prices and commodities are starting to rise, with some upturns in price inflation, but with slow supply-side responses demand exceeds supply. We’ll see an uptick in the consumer price index over the next six months. So I’d hesitate to add much further stimulus. But we’ll likely end up with as much as $2 trillion.

How effective have Japan’s efforts been?

The Japanese did not go to the same extremes as many of us did in shutting down. They too are running zero rate interest policies, as is the world. They have sufficient liquidity and their monetary policy looks fine.

Japan will likely end the year below its 2020 peak. It will also have a 3–4% pick-up in growth in 2021. If we’re lucky enough to have the Tokyo Olympics in 2021, the amount of international travel will be considerably less than anticipated.

Did Canada do the right thing?

Yes, in broad terms the Bank of Canada has done an outstanding job in weaving through the various obstacles. The fiscal side is a little less ‘injective’ than ours has been, given Canada’s social structures – unemployment, health care – with more automatic stabilisers.

And the Europeans?

A month ago, I would have said yes. But today we don’t yet know the degree of the virus’s rebound. The continental Europeans were slower to get their act together because of their rules on fiscal policy and on borrowing and floating bonds. Their monetary policy is still zero-interest rates. I don’t think they provided the depth of policy response that the Bank of Canada or Fed has, but they’re going in the right direction.

The United Kingdom has done an outstanding job in encouraging a recovery. Its fiscal policy is spot on. So that’s steady as she goes for four – the US, Japan, Canada and the UK. This suggests they’ve done as well as they could, and should keep a little in reserve. The European continent needs a stronger fiscal policy response.

How about China?

China’s downturn seems stickier than most other G20 countries. Its economy is far less responsive to fiscal and monetary policy. It doesn’t have well-developed financial markets. The bond market is less structured. So the policy tools are more credit rationing than interest rate determined lending, or playing in stock and bond markets by the central bank. The fiscal side is more complicated, because the industries owned by the People’s Liberation Army are outside the control of the central authorities.

But if the Chinese authorities say the economy is growing, then it must be. I would not argue that reciprocal trade exists between China and the rest of the world. Barriers for Chinese importers to world markets are sufficiently high that China will not be a classic engine of growth. It runs sizeable net surpluses, so it will suck reserves out of the world economy, not provide stimulus.

Have G20 members collectively added value?

Some have not been very effective in controlling macroeconomic conditions. In Latin America the virus continues to spread with horrifying results. Brazil and Argentina are in a serious condition, including macroeconomically. Rebuilding will be difficult and time-consuming. They have only stopped the fall. Most emerging and developing markets do not have the borrowing space to do much in aggressive fiscal stimulus. Financial markets are beginning to discriminate again between the quality of debt in the industrialised and developing worlds. This is not healthy for emerging markets.

What should G20 leaders at their Riyadh Summit do?

They need to pray that they’ve got the answers coming down the pike.

They had a strong start with their March summit, but I hope they can be more practical than they tend to be. They need to hone down their wish lists and focus on a significant issue.