As the global economy falters, central banks take the plunge

The world’s central banks are ramping up their efforts to support the world economy as the onset of winter in the northern hemisphere triggers a surge in Covid-19 cases from Russia to Europe and the U.S.

In the past couple of weeks, the European Central Bank has all-but committed to a major loosening of its monetary policy, the Federal Reserve has warned repeatedly of the growing threat to the U.S. economy from the disease’s spread, and the U.K. and Australian central banks have already taken the plunge: the Bank of England increased its asset purchase program by 150 billion pounds, 50 billion more than expected, while the Reserve Bank of Australia announced its first ever quantitative easing program and cut its key rate to a new record low of 0.1%.

The moves are a response to a dramatic loss of momentum in the European economy in particular, as infection rates soar and governments rush to clamp down on unnecessary contact through social and business life. Economists at Dutch bank ABN AMRO expect Eurozone GDP to contract by 3.8% in the fourth quarter as a result. The impact on U.K. GDP is already clear in record job losses in October and a collapse in business investment, as measured by the Bank of England. Pantheon Macroeconomics expects U.K. to stagnate at best in the current quarter.

If the U.S. appears to be dragging its feet, compared to its European counterparts, that’s largely for two reasons: firstly, high-frequency data from the U.S. economy have held up somewhat better, especially in areas such as the labor market, retail sales and the housing market. The U.S. economy added a healthy 638,000 jobs in October, according to data released Friday. On Tuesday, the National Federation of Independent Business said small business optimism returned to its highest level in October since the pandemic erupted.

Secondly, the Fed’s last policy meeting was held only a day after the bitterly-contested presidential election, and any action from the central bank would inevitably have been seen as a comment on the political process, something it would want to avoid at all costs.

However, the Fed is clearly concerned by the way Covid-19 has roared back to life against a backdrop of popular resistance to restrictive public health measures.

“If the pandemic persists for longer than anticipated – especially if there are extended delays in the production or distribution of a successful vaccine – downward pressure on the U.S. economy could derail the nascent recovery and strain financial markets,” the central bank said in its half-yearly Financial Stability Report, released on Monday.

“Given the generally high level of leverage in the non-financial business sector, prolonged weak profits could trigger financial stress and defaults.”

Fed chairman Jerome Powell has repeatedly called for the government to take the lead in supporting the economy with fiscal measures. However, the elections appear to have confirmed the split in Congress that stopped a package of fiscal measures being agreed before last week. If that continues to stop a major support package being crafted, the Fed may also feel it has no choice but to dive in.

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