Coronavirus: How Are Countries Responding to the Economic Crisis?
The coronavirus pandemic is slowing global commerce to a crawl, but many of the world’s largest economies are taking extraordinary actions to propel them through the crisis and, hopefully, into a rapid recovery.

Backgrounder by Jonathan Masters

April 2, 2020

A pedestrian wearing a protective face mask amid the the coronavirus (COVID-19) outbreak is reflected on a screen displaying stock prices outside a brokerage in Tokyo, Japan, on March 17, 2020. Issei Kato/Reuters



The coronavirus is throttling the global economy. In a matter of weeks, the highly contagious disease has pushed the world to the brink of a recession more severe than the 2008 financial crisis. The depth and duration of the downturn will depend on many factors, including the behavior of the virus itself, public health responses, and economic interventions. 

Given the extraordinary nature of the pandemic-induced crisis, fiscal and monetary policymakers are working without a playbook. Many are already taking stunning actions, and the price tag of these bailout measures could top $10 trillion, analysts say.

How bad will the recession be?

As the world started to come to grips with the scale of the crisis in March, many leading economists offered grim forecasts. The outlook for growth in 2020, said International Monetary Fund head Kristalina Georgieva, is “a recession at least as bad as during the global financial crisis or worse.” Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said the virus could cut global growth in half, to 1.5 percent, or more, and called on governments to “throw everything we got at it.”

Many governments are effectively freezing social and economic activity in all or parts of their countries to contain the outbreak, shuttering nonessential businesses and ordering residents to stay at home for weeks or months. By late March, billions of people worldwide were under some type of lockdown. The hope is that economies can power down without causing extreme disruptions, such as widespread business failures or joblessness, and then quickly get back up to speed after the disease abates.

$10 trillion
Potential price tag of global bailout

Some countries and industries will be hit harder than others during the slowdown. The travel and tourism sectors, for instance, are facing their biggest crisis in history. Most of the world’s airlines are teetering on the verge of bankruptcy. Meanwhile, the dramatic drop in energy demand will cut deeply into the revenues of petrostates such as Iran, Russia, and Saudi Arabia.

Here is what some of the world’s largest economies are doing to respond to the coronavirus downturn.

China

The world’s second-largest economy was stirring back to life in March after suffering a withering blow from the coronavirus, which originated in the city of Wuhan in Hubei Province in late 2019. Several weeks of government-imposed lockdowns on dozens of cities led to double-digit percentage declines in factory output, retail sales, construction, and other economic activity. Urban unemployment reached a record high of more than 6 percent in February. Some researchers say China’s growth could slow to below 3 percent this year as global demand for its exports dips.

China’s leadership seems less inclined to spearhead a global economic recovery this time than it did following the 2008 financial crisis, when it spent liberally on a stimulus package of more than a half trillion dollars. In the years since, China has roughly doubled its government debt—to about 60 percent of gross domestic product (GDP)—and many analysts think it cannot afford to spend so aggressively again.

So far, China’s central bank has taken relatively modest actions, reducing reserve requirements for banks, which will allow them to loan an additional $80 billion to struggling businesses, and indicating that it will cut interest rates in the months ahead. 

Germany

The German economy is expected to shrink for the first time since 2009, anywhere from 3 to 10 percent this year depending on the length of the country’s lockdown. In March, nearly a half million German companies applied to have their employees join a short-term government work program intended to prevent mass layoffs.

To counter the economic fallout from the coronavirus, Berlin is taking bold actions, abandoning its steadfast commitment to balanced budgets, known as schwarze Null or “black zero.” It is allocating at least 350 billion euros—or about 10 percent of its GDP—to prop up the eurozone’s largest economy. Funds will be spent to bail out struggling businesses, including by making unlimited loans and potentially taking equity stakes.

We’re doing whatever is necessary.Angela Merkel, Chancellor of Germany

“We’re doing whatever is necessary,” said Chancellor Angela Merkel, who also led the country through the 2008 crisis. “And we won’t be asking every day what it means for our deficit.” Officials note that Germany is poised to spend aggressively because the government has kept its finances in check in recent years, reducing its debt-to-GDP ratio from more than 80 percent in 2010 to below 60 percent today. 

Japan

Economists predict that Japan’s export-driven economy will shrink by around 3 percent this year, which would be its worst performance since 2008. The deep impact from the pandemic comes on the heels of an economic slowdown from a sales tax hike last fall. The virus has also forced the government to postpone the Summer Olympics until next year.

Like some of its peers in the West, Prime Minister Shinzo Abe’s government is reportedly planning an unprecedented spending package to help the country through one of its most challenging periods in recent memory. Stimulus measures could include cash payments to citizens, interest-free loans, and delayed tax payments, among other things.

Amid market volatility in mid-March, Japan’s central bank announced it would double to more than $100 billion its annual purchase of stocks, bonds, and other assets. However, some critics say the move demonstrated the Bank of Japan’s limited options after having kept interest rates next to zero for years.

United Kingdom

The pandemic is paralyzing the UK economy just as the country’s leaders are negotiating its post-Brexit relationship with the European Union. Prior to the outbreak, there were already concerns about a recession from a so-called hard Brexit. Economists now say that the coronavirus pandemic could take a 5 percent slice out of the economy in 2020.

The government is prepared to make interventions that would be “unprecedented in the history of the British state” to support the economy, finance minister Rishi Sunak said in early March. Among its emergency measures, the Treasury has pledged to pay 80 percent of workers’ salaries for several months to keep companies from resorting to huge layoffs; deferred tax payments; increased unemployment benefits; and made loan guarantees.
15% of GDP
Potential UK fiscal commitments
Source:
Wall Street Journal.

Additionally, the Bank of England has lowered its benchmark interest rate to 0.5 percent, a record low, and loosened capital requirements for banks. All told, the rescue efforts could see Britain spend upward of 400 billion pounds, or about 15 percent of GDP. 

United States

In a sign of the staggering toll the virus was already taking on the U.S. economy, roughly 10 million Americans filed for unemployment the last two weeks of March. The worst single week of filings prior to that was 695,000 in 1982. Some analysts suggest that the U.S. unemployment rate could reach as high as 40 percent in the second quarter of the year, significantly higher than its peak of 25 percent during the Great Depression.

While Washington has been criticized for mismanaging the public health response to the pandemic, it’s also been credited with moving decisively to stabilize financial markets. In March, the Federal Reserve indicated that it will do anything within its power to support the economy and provide liquidity. Among the Fed’s historic actions have been: cutting interest rates close to zero, reducing bank reserve requirements to zero, rapidly purchasing hundreds of billions of dollars in Treasuries and mortgage-backed securities, buying corporate debt, and extending emergency credit to nonbanks.

Meanwhile, on the fiscal side, lawmakers passed a $2 trillion stimulus package that some analysts have characterized as a bridge loan to get the U.S. economy through the crisis. It includes direct payments of up to $1200 to individuals, hundreds of billions of dollars in loans and grants to businesses, increases to unemployment benefits, and support for hospitals and health-care providers. “In effect, this is a wartime level of investment into our nation,” said Senate Majority Leader Mitch McConnell. 

Multilateral Institutions

European Central Bank (ECB). Through its Pandemic Emergency Purchase Program, the ECB is set to buy up to 750 billion euros in additional bonds this year to help its members amid the downturn. And further action could be coming, as ECB President Christine Lagarde promised there will be “no limits” on the bank’s defense of the eurozone.

International Monetary Fund. The IMF announced it will set aside $50 billion to lend to member countries that are facing acute financial crises as a result of the coronavirus, with preference given to emerging economies.

World Bank Group. The World Bank said it will respond to the pandemic with up to $12 billion in financing for hard-hit developing countries.

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