The numbers are compelling. And eye bogglingly large.
Covid-19 spreading in Europe and the US, after hitting Asia, is triggering a contraction in global growth in 1H20. And its impact depth depends on the length of your piece of string.
Global recession this year appears to be the standard base economic case.
And the big shock has delivered big policy change settings from central banks. All four major central banks are back on the quantitative easing path. And the resolve is to do what it takes. Which is where the numbers get large.
Counteracting a slump in growth comparable to the GFC and a recession possibly worse that of 2001, the policy response will provide some downside protection. But it will be the primary response from China, determining how quickly a turnaround may occur.
The Chinese economy should rebound in the second half of this year, followed more slowly by the US and then Europe. The Chinese are taking a back to work approach now that new infections are slowing, and hoping the rest of the world follows suit.
China already has committed to a $300 billion stimulus package.
And I think it’s a pretty safe bet, the PROC will again be on the front foot expanding the size of this package. The next expected expansionary fiscal leg could come in about four weeks at the National People’s Congress standing committee. Policy makers are expected to significantly boost the quota for the issuance of local government special bonds to front load public spending.
Given the growth shock, Beijing will likely push back the deadline of “doubling 2010 GDP” by first quarter next year. Congress has indicated its tolerance for short term lower growth but it wants labour market stability. And to release the pent up demand in discretionary consumption.
Particularly as the US Congress is moving towards bi-partisan support for a larger $US750 billion stimulus package.
The US is still nominally the world’s largest economy with around 25% of global GDP at $21 trillion, closely followed by China at just under $15 trillion.
So, the policy response needs to be large and include tax relief and direct handouts to impacted households, as well as large monetary measures by the Fed.
A $USD750 billion total package – equivalent to around 3.5% of GDP, is needed, to give both business and households confidence to spend.
Timing of Congress vote and execution risk remain moving targets.
And if large one-size-fits all package gets up, this could put a solid floor under the US economy and markets and let the Covid-19 rebuild get underway in earnest. And I think this will led to further gains in the Dow, S&P and in our market. (note the tinkling of the bell for the bottom of the market may be getting a little louder for a 10% plus rally!)
Outside of the G4, the 25 remaining central banks have coordinated Covid-19 responses. Increasingly what is clearer is these responses may need to be larger and longer to respond to Coronavirus inflicted economic damage. And collectively the packages run into the trillions. Canberra, in our case, may need to be looking at possibly doubling its economic commitment, to make sure the wheels don’t fall off.
My giddy aunt’s response to this is to remain calm, make tea, and buy when the white of the seller’s eyes can be seen. Not just yet she reckons. And if I mention BHP one more time, it’s likely to send her into somnambulant sleep!