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Jeff Bezos: Widespread coronavirus testing needed before economy can get running again

Jeff Bezos, founder and chief executive officer of Inc., speaks at the National Press Club in Washington, D.C., on Thursday, Sept. 19, 2019.
Andrew Harrer | Bloomberg | Getty Images

Jeff Bezos on Thursday published Amazon’s annual shareholder letter, in which he detailed how the company has responded to the coronavirus pandemic so far.
Bezos stressed the importance of testing in order for the public to return to work, as well as for his own employees to be protected from the virus. He pointed to Amazon’s efforts to develop “incremental testing capacity,” which the company announced last week. As part of that announcement, Amazon said it hopes to begin testing all of its employees, including those who show no symptoms.

“Regular testing on a global scale, across all industries, would both help keep people safe and help get the economy back up and running,” Bezos said. “For this to work, we as a society would need vastly more testing capacity than is currently available.”
Bezos detailed other steps Amazon has taken to curb the coronavirus, such as providing employees with face masks and distributing temperature checks for warehouse workers, delivery drivers and Whole Foods employees. He added that Amazon temporarily closed some of its physical stores, including Amazon Books, Amazon 4-star and Amazon Pop Up stores as they don’t sell essential products, and offered those store employees roles in other parts of the company.
Amazon’s logistics and delivery systems have been under some strain since the pandemic worsened across the globe. Due to a surge in online orders, the company was forced to prioritize shipments of essential goods at its fulfillment centers, resulting in longer delivery times and a rare disruption to its typical two-day and one-day delivery windows.
Bezos said unlike the typical holiday shopping season, the surge over the last few months “occurred with little warning, creating major challenges for our suppliers and delivery network.” For that reason and others, Bezos added that his “own time and thinking” continues to be focused on the coronavirus.
“I am extremely grateful to my fellow Amazonians for all the grit and ingenuity they are showing as we move through this,” Bezos said. “You can count on all of us to look beyond the immediate crisis for insights and lessons and how to apply them going forward.”

You can read the letter in full below:
To our shareowners:
One thing we’ve learned from the COVID-19 crisis is how important Amazon has become to our customers. We want you to know we take this responsibility seriously, and we’re proud of the work our teams are doing to help customers through this difficult time.
Amazonians are working around the clock to get necessary supplies delivered directly to the doorsteps of people who need them. The demand we are seeing for essential products has been and remains high. But unlike a predictable holiday surge, this spike occurred with little warning, creating major challenges for our suppliers and delivery network. We quickly prioritized the stocking and delivery of essential household staples, medical supplies, and other critical products.
Our Whole Foods Market stores have remained open, providing fresh food and other vital goods for customers. We are taking steps to help those most vulnerable to the virus, setting aside the first hour of shopping at Whole Foods each day for seniors. We have temporarily closed Amazon Books, Amazon 4-star, and Amazon Pop Up stores because they don’t sell essential products, and we offered associates from those closed stores the opportunity to continue working in other parts of Amazon.
Crucially, while providing these essential services, we are focused on the safety of our employees and contractors around the world—we are deeply grateful for their heroic work and are committed to their health and well-being. Consulting closely with medical experts and health authorities, we’ve made over 150 significant process changes in our operations network and Whole Foods Market stores to help teams stay healthy, and we conduct daily audits of the measures we’ve put into place. We’ve distributed face masks and implemented temperature checks at sites around the world to help protect employees and support staff. We regularly sanitize door handles, stairway handrails, lockers, elevator buttons, and touch screens, and disinfectant wipes and hand sanitizer are standard across our network.
We’ve also introduced extensive social distancing measures to help protect our associates. We have eliminated stand-up meetings during shifts, moved information sharing to bulletin boards, staggered break times, and spread out chairs in breakrooms. While training new hires is challenging with new distancing requirements, we continue to ensure that every new employee gets six hours of safety training. We’ve shifted training protocols so we don’t have employees gathering in one spot, and we’ve adjusted our hiring processes to allow for social distancing.
A next step in protecting our employees might be regular testing of all Amazonians, including those showing no symptoms. Regular testing on a global scale, across all industries, would both help keep people safe and help get the economy back up and running. For this to work, we as a society would need vastly more testing capacity than is currently available. If every person could be tested regularly, it would make a huge difference in how we fight this virus. Those who test positive could be quarantined and cared for, and everyone who tests negative could re-enter the economy with confidence.
We’ve begun the work of building incremental testing capacity. A team of Amazonians—from research scientists and program managers to procurement specialists and software engineers—moved from their normal day jobs onto a dedicated team to work on this initiative. We have begun assembling the equipment we need to build our first lab and hope to start testing small numbers of our frontline employees soon. We are not sure how far we will get in the relevant timeframe, but we think it’s worth trying, and we stand ready to share anything we learn.
While we explore longer-term solutions, we are also committed to helping support employees now. We increased our minimum wage through the end of April by $2 per hour in the U.S., $2 per hour in Canada, £2 per hour in the UK, and €2 per hour in many European countries. And we are paying associates double our regular rate for any overtime worked—a minimum of $34 an hour—an increase from time and a half. These wage increases will cost more than $500 million, just through the end of April, and likely more than that over time. While we recognize this is expensive, we believe it’s the right thing to do under the circumstances. We also established the Amazon Relief Fund—with an initial $25 million in funding—to support our independent delivery service partners and their drivers, Amazon Flex participants, and temporary employees under financial distress.
In March, we opened 100,000 new positions across our fulfillment and delivery network. Earlier this week, after successfully filling those roles, we announced we were creating another 75,000 jobs to respond to customer demand. These new hires are helping customers who depend on us to meet their critical needs. We know that many people around the world have suffered financially as jobs are lost or furloughed. We are happy to have them on our teams until things return to normal and either their former employer can bring them back or new jobs become available. We’ve welcomed Joe Duffy, who joined after losing his job as a mechanic at Newark airport and learned about an opening from a friend who is an Amazon operations analyst. Dallas preschool teacher Darby Griffin joined after her school closed on March 9th and now helps manage new inventory. We’re happy to have Darby with us until she can return to the classroom.
Amazon is acting aggressively to protect our customers from bad actors looking to exploit the crisis. We’ve removed over half a million offers from our stores due to COVID-based price gouging, and we’ve suspended more than 6,000 selling accounts globally for violating our fair-pricing policies. Amazon turned over information about sellers we suspect engaged in price gouging of products related to COVID-19 to 42 state attorneys general offices. To accelerate our response to price-gouging incidents, we created a special communication channel for state attorneys general to quickly and easily escalate consumer complaints to us.
Amazon Web Services is also playing an important role in this crisis. The ability for organizations to access scalable, dependable, and highly secure computing power—whether for vital healthcare work, to help students continue learning, or to keep unprecedented numbers of employees online and productive from home—is critical in this situation. Hospital networks, pharmaceutical companies, and research labs are using AWS to care for patients, explore treatments, and mitigate the impacts of COVID-19 in many other ways. Academic institutions around the world are transitioning from in-person to virtual classrooms and are running on AWS to help ensure continuity of learning. And governments are leveraging AWS as a secure platform to build out new capabilities in their efforts to end this pandemic.
We are collaborating with the World Health Organization, supplying advanced cloud technologies and technical expertise to track the virus, understand the outbreak, and better contain its spread. WHO is leveraging our cloud to build large-scale data lakes, aggregate epidemiological country data, rapidly translate medical training videos into different languages, and help global healthcare workers better treat patients. We are separately making a public AWS COVID-19 data lake available as a centralized repository for up-to-date and curated information related to the spread and characteristics of the virus and its associated illness so experts can access and analyze the latest data in their battle against the disease.
We also launched the AWS Diagnostic Development Initiative, a program to support customers working to bring more accurate diagnostic solutions to market for COVID-19. Better diagnostics help accelerate treatment and containment of this pandemic. We committed $20 million to accelerate this work and help our customers harness the cloud to tackle this challenge. While the program was established in response to COVID-19, we also are looking toward the future, and we will fund diagnostic research projects that have the potential to blunt future infectious disease outbreaks.
Customers around the world have leveraged the cloud to scale up services and stand up responses to COVID-19. We joined the New York City COVID-19 Rapid Response Coalition to develop a conversational agent to enable at-risk and elderly New Yorkers to receive accurate, timely information about medical and other important needs. In response to a request from the Los Angeles Unified School District to transition 700,000 students to remote learning, AWS helped establish a call center to field IT questions, provide remote support, and enable staff to answer calls. We are providing cloud services to the CDC to help thousands of public health practitioners and clinicians gather data related to COVID-19 and inform response efforts. In the UK, AWS provides the cloud computing infrastructure for a project that analyzes hospital occupancy levels, emergency room capacity, and patient wait times to help the country’s National Health Service decide where best to allocate resources. In Canada, OTN—one of the world’s largest virtual care networks—is scaling its AWS-powered video service to accommodate a 4,000% spike in demand to support citizens as the pandemic continues. In Brazil, AWS will provide the São Paulo State Government with cloud computing infrastructure to guarantee online classes to 1 million students in public schools across the state.
Following CDC guidance, our Alexa health team built an experience that lets U.S. customers check their risk level for COVID-19 at home. Customers can ask, “Alexa, what do I do if I think I have COVID-19?” or “Alexa, what do I do if I think I have coronavirus?” Alexa then asks a series of questions about the person’s symptoms and possible exposure. Based on those responses, Alexa then provides CDC-sourced guidance. We created a similar service in Japan, based on guidance from the Japanese Ministry of Health, Labor, and Welfare.
We’re making it easy for customers to use or Alexa to donate directly to charities on the front lines of the COVID-19 crisis, including Feeding America, the American Red Cross, and Save the Children. Echo users have the option to say, “Alexa, make a donation to Feeding America COVID-19 Response Fund.” In Seattle, we’ve partnered with a catering business to distribute 73,000 meals to 2,700 elderly and medically vulnerable residents in Seattle and King County during the outbreak, and we donated 8,200 laptops to help Seattle Public Schools students gain access to a device while classes are conducted virtually.

Beyond COVID

Although these are incredibly difficult times, they are an important reminder that what we do as a company can make a big difference in people’s lives. Customers count on us to be there, and we are fortunate to be able to help. With our scale and ability to innovate quickly, Amazon can make a positive impact and be an organizing force for progress.
Last year, we co-founded The Climate Pledge with Christiana Figueres, the UN’s former climate change chief and founder of Global Optimism, and became the first signatory to the pledge. The pledge commits Amazon to meet the goals of the Paris Agreement 10 years early—and be net zero carbon by 2040. Amazon faces significant challenges in achieving this goal because we don’t just move information around—we have extensive physical infrastructure and deliver more than 10 billion items worldwide a year. And we believe if Amazon can get to net zero carbon ten years early, any company can—and we want to work together with all companies to make it a reality.
To that end, we are recruiting other companies to sign The Climate Pledge. Signatories agree to measure and report greenhouse gas emissions regularly, implement decarbonization strategies in line with the Paris Agreement, and achieve net zero annual carbon emissions by 2040. (We’ll be announcing new signatories soon.)
We plan to meet the pledge, in part, by purchasing 100,000 electric delivery vans from Rivian—a Michigan-based producer of electric vehicles. Amazon aims to have 10,000 of Rivian’s new electric vans on the road as early as 2022, and all 100,000 vehicles on the road by 2030. That’s good for the environment, but the promise is even greater. This type of investment sends a signal to the marketplace to start inventing and developing new technologies that large, global companies need to transition to a low-carbon economy.
We’ve also committed to reaching 80% renewable energy by 2024 and 100% renewable energy by 2030. (The team is actually pushing to get to 100% by 2025 and has a challenging but credible plan to pull that off.) Globally, Amazon has 86 solar and wind projects that have the capacity to generate over 2,300 MW and deliver more than 6.3 million MWh of energy annually—enough to power more than 580,000 U.S. homes.
We’ve made tremendous progress cutting packaging waste. More than a decade ago, we created the Frustration-Free Packaging program to encourage manufacturers to package their products in easy-to-open, 100% recyclable packaging that is ready to ship to customers without the need for an additional shipping box. Since 2008, this program has saved more than 810,000 tons of packaging material and eliminated the use of 1.4 billion shipping boxes.
We are making these significant investments to drive our carbon footprint to zero despite the fact that shopping online is already inherently more carbon efficient than going to the store. Amazon’s sustainability scientists have spent more than three years developing the models, tools, and metrics to measure our carbon footprint. Their detailed analysis has found that shopping online consistently generates less carbon than driving to a store, since a single delivery van trip can take approximately 100 roundtrip car journeys off the road on average. Our scientists developed a model to compare the carbon intensity of ordering Whole Foods Market groceries online versus driving to your nearest Whole Foods Market store. The study found that, averaged across all basket sizes, online grocery deliveries generate 43% lower carbon emissions per item compared to shopping in stores. Smaller basket sizes generate even greater carbon savings.
AWS is also inherently more efficient than the traditional in-house data center. That’s primarily due to two things—higher utilization, and the fact that our servers and facilities are more efficient than what most companies can achieve running their own data centers. Typical single-company data centers operate at roughly 18% server utilization. They need that excess capacity to handle large usage spikes. AWS benefits from multi-tenant usage patterns and operates at far higher server utilization rates. In addition, AWS has been successful in increasing the energy efficiency of its facilities and equipment, for instance by using more efficient evaporative cooling in certain data centers instead of traditional air conditioning. A study by 451 Research found that AWS’s infrastructure is 3.6 times more energy efficient than the median U.S. enterprise data center surveyed. Along with our use of renewable energy, these factors enable AWS to do the same tasks as traditional data centers with an 88% lower carbon footprint. And don’t think we’re not going to get those last 12 points—we’ll make AWS 100% carbon free through more investments in renewable energy projects.

Leveraging scale for good

Over the last decade, no company has created more jobs than Amazon. Amazon directly employs 840,000 workers worldwide, including over 590,000 in the U.S., 115,000 in Europe, and 95,000 in Asia. In total, Amazon directly and indirectly supports 2 million jobs in the U.S., including 680,000-plus jobs created by Amazon’s investments in areas like construction, logistics, and professional services, plus another 830,000 jobs created by small and medium-sized businesses selling on Amazon. Globally, we support nearly 4 million jobs. We are especially proud of the fact that many of these are entry-level jobs that give people their first opportunity to participate in the workforce.
And Amazon’s jobs come with an industry-leading $15 minimum wage and comprehensive benefits. More than 40 million Americans—many making the federal minimum wage of $7.25 an hour—earn less than the lowest-paid Amazon associate. When we raised our starting minimum wage to $15 an hour in 2018, it had an immediate and meaningful impact on the hundreds of thousands of people working in our fulfillment centers. We want other big employers to join us by raising their own minimum pay rates, and we continue to lobby for a $15 federal minimum wage.
We want to improve workers’ lives beyond pay. Amazon provides every full-time employee with health insurance, a 401(k) plan, 20 weeks paid maternity leave, and other benefits. These are the same benefits that Amazon’s most senior executives receive. And with our rapidly changing economy, we see more clearly than ever the need for workers to evolve their skills continually to keep up with technology. That’s why we’re spending $700 million to provide more than 100,000 Amazonians access to training programs, at their places of work, in high-demand fields such as healthcare, cloud computing, and machine learning. Since 2012, we have offered Career Choice, a pre-paid tuition program for fulfillment center associates looking to move into high- demand occupations. Amazon pays up to 95% of tuition and fees toward a certificate or diploma in qualified fields of study, leading to enhanced employment opportunities in high-demand jobs. Since its launch, more than 25,000 Amazonians have received training for in-demand occupations.
To ensure that future generations have the skills they need to thrive in a technology-driven economy, we started a program last year called Amazon Future Engineer, which is designed to educate and train low-income and disadvantaged young people to pursue careers in computer science. We have an ambitious goal: to help hundreds of thousands of students each year learn computer science and coding. Amazon Future Engineer currently funds Introduction to Computer Science and AP Computer Science classes for more than 2,000 schools in underserved communities across the country. Each year, Amazon Future Engineer also gives 100 four-year, $40,000 college scholarships to computer science students from low-income backgrounds. Those scholarship recipients also receive guaranteed, paid internships at Amazon after their first year of college. Our program in the UK funds 120 engineering apprenticeships and helps students from disadvantaged backgrounds pursue technology careers.
For now, my own time and thinking continues to be focused on COVID-19 and how Amazon can help while we’re in the middle of it. I am extremely grateful to my fellow Amazonians for all the grit and ingenuity they are showing as we move through this. You can count on all of us to look beyond the immediate crisis for insights and lessons and how to apply them going forward.
Reflect on this from Theodor Seuss Geisel:
“When something bad happens you have three choices. You can either let it define you, let it destroy you, or you can let it strengthen you.”
I am very optimistic about which of these civilization is going to choose.
Even in these circumstances, it remains Day 1. As always, I attach a copy of our original 1997 letter.
Jeffrey P. Bezos
Founder and Chief Executive Officer, Inc.

Grab has 'ample liquidity' to tide through a 3-year recession, CEO predicts

Southeast Asia’s ride-hailing giant Grab saw its transportation business take a hit due to the coronavirus outbreak, but CEO Anthony Tan predicts that his company will have enough liquidity to tide through a recession.
“In some countries, our transport GMV is down by double-digit percentage,” Tan told CNBC’s Nancy Hungerford in an interview. 

GMV is a commonly tracked metric by internet companies that measures the total value of sales for goods and services sold on their platforms.
He explained that the company’s diversified business model, which includes food and grocery delivery among others, has helped Grab weather some of the coronavirus impact. Grab has adjusted to the new environment by scaling up some of its non-transport business segments to meet demand spikes and moving its supplies around to ensure drivers on the platform can still have income opportunities, the CEO said.

We are fortunate to have ample liquidity to tide us through, whether it’s a 12-month recession or 36-month recession.

Anthony Tan
CEO of Grab

Still, the uptick in delivery services has not completely offset the impact on the transport business but Tan appeared optimistic about the outlook. 
“Looking ahead, though, I know that transport is a mass-market essential service, so we anticipate it will recover strongly once people start commuting again post lockdown,” he said. 
Grab operates in 339 cities across eight countries in Asia, including Singapore, Malaysia, and Indonesia.

All of those countries have implemented some forms of social distancing measures, some stricter than others, and more people started staying at home in recent months due to the virus outbreak. It has reduced the demand for transportation. 
Globally, more than 2 million people have been infected and the International Monetary Fund has predicted the worst economic downturn since the Great Depression.

That has affected the income of many drivers on Grab’s platform, including some who have contracted Covid-19, the disease caused by the coronavirus. In response, the company said it invested close to $40 million in financial assistance across the region and introduced additional support measures in places like Singapore, where it is headquartered.
“They can focus on recovering rather than worrying about putting food on the table,” Tan said.
When asked about the company’s overall financial health, he explained that most of Grab’s costs are variable and they decline when demand is down. 
“Because of our strong investor base, we are fortunate to have ample liquidity to tide us through, whether it’s a 12-month recession or 36-month recession,” Tan added. 
Grab counts the likes of SoftBank, Singapore’s state investment firm Temasek Holdings and Chinese ride-hailing giant Didi Chuxing as its investors. It has raised $9.9 billion to date, according to Crunchbase data, including an investment commitment from Japan’s Mitsubishi UFJ Financial Group for $706 million in February. 

The agonies of stock-picking in a falling market

Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
I SUSPECT THAT this not a common feeling, but part of me is excited about the crash in stock prices. It is the part of me with a personal-account portfolio. I have long-term financial goals. I want to hold equity risk, even as others run from it. If I can buy streams of cash flows at lower prices, I am happy. But another part of me, the professional who invests on behalf of others, is anxious. I try to fuse these two selves. It is not easy.

In my lifetime there have been three bear markets in which the value of shares in aggregate has fallen by half. Perhaps this episode will be as bad—or worse. I don’t know. I can say this, though. For a long-term investor who doesn’t have to worry about perfect timing, there should be opportunities to buy good stocks at attractive prices. As a private investor, I can wait for risky bets eventually to pay off. My clients may not be so patient.
Nobody knows how this pandemic will play out. Lots of people claim to know, of course. A few of them will be right, by luck or judgment. That’s a matter for the scientists and for economists, too. The biggest insight I have gleaned from economics is that asset prices are set at the margin. The stock price on the screen is the one at which the most desperate seller and the bravest buyer are willing to do business. When the ranks of the first group overwhelm the second, the result is a rout—or capitulation, in market-speak.
Every recession is unique. This one has the impact of a natural disaster or a nuclear accident. But every recession is also the same. You can never be sure how deep it will be, how long it will last and what scars it will leave. China has just experienced its sharpest downturn in a century. That is scary. But 2008 was scary. The dotcom bust was scary. I was a baby in 1974, but my old boss tells me that was scary. True, this is a different kind of scary. I call my parents every day to check how they are. I didn’t do that in 2008. (I wasn’t trading stocks in pyjamas on a weekday either.) This could be a savage recession. But it will be like other recessions in that there will be a recovery.
In the meantime, stock prices can keep falling. I understand why people are selling. A lot are forced to. They may have borrowed to buy stocks and had their loans called by nervy lenders. Fund managers that promised low volatility must cut their equity risk. But capitulation is more than this. It is the dumping of stocks that have already fallen a long way. Retail investors are prone to it. But why would any professional do it? Well, sometimes you sell your duds so you don’t have to talk about them anymore—to the firm’s risk manager or to your clients. Owning a stock that goes to zero is too horrible to contemplate. So you sell. And sometimes you sell things that as a private investor you would hold onto or double-down on. Clients want you to take risk. But they don’t like what risk-taking looks like when it doesn’t work. Try explaining, after the fact, why you bought a stock two weeks before the firm went bankrupt, because you judged that, should it survive or be rescued, you stood to make ten times your money.

I am lucky. I have been in the top-quartile of stockpickers. So I have earned the trust to make risky bets in a falling market. A good portfolio in a recession is not necessarily a good portfolio for when the economy recovers. I know that at some point I am going to have to change tack. I would have to be a genius to time this shift perfectly. And I am not a genius. The best I can hope for is not to get it too badly wrong.
My instinct is to be contrarian, to buy what others now hate. Some industries, such as oil, are outside my comfort zone. The politics of OPEC are too messy for me to fathom. But I have an eye on mining companies with attractive dividend yields and low debt. If China’s economy rebounds, they will benefit. And, yes, I am absolutely looking at airlines. A national champion or two is bound to be saved. In the right situation, I might make a lot of money for clients. Dislocation on this scale will take out the weaker players in every industry. The best companies will emerge even stronger. I hope I pick the right ones.
There will come a time when the market surveys the whole panorama—bad businesses cleared out; interest rates even lower; fiscal policy in the pipeline; cheaper stocks—and changes direction. I have to be ready for that. The S&P 500 is America’s capital stock. It will survive (or most of it will). People will want to fly, stay in hotels and go to restaurants and coffee bars again. I have to keep that in mind always. I feel queasy. But this is the game I have chosen to be in.
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This article appeared in the Finance and economics section of the print edition under the headline “Capitulation”
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Economies can rebound quickly from massive GDP slumps—but not always

Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
IT WILL BE some time—years most likely—before the full extent of the economic blow from covid-19 can be estimated with any confidence. As ever more of the global economy enters a prolonged shutdown, it seems increasingly clear that the world is facing a drop in output unprecedented in its breadth and intensity. Some analysts see in the growing economic disruptions and market panic the first stirrings of an economic collapse more serious than the global financial crisis of 2007-09. Joachim Fels, an economist at PIMCO, an investment fund, recently warned that in the absence of sufficiently aggressive action from governments the world could face a market meltdown and ensuing depression. All downturns create discomfort, but the pain of a slump—even a very steep one—depends greatly on how long it lasts. History suggests that rapid rebounds from enormous output losses are possible, but not by any means guaranteed.

Some economies, perhaps those of Singapore or even South Korea, could find a footing by the second half of the year, sufficient to offset some of the production lost during the first half. But the probability that others could experience extreme declines in GDP in 2020—perhaps as large as 10%—grows by the day. Falls of that magnitude are not especially unusual in developing economies, where growth is highly volatile. (To take just one example, there have been ten years since 1980 in which real GDP in Libya has fallen by at least 10%, between which plunges the economy has experienced annual growth spurts of as much as 125%.) In industrialised countries swings of that scale are exceedingly rare. An analysis of data gathered by the World Bank reveals that since 1960, across rich countries, there have been only 13 instances in which an economy experienced an annual decline in GDP of at least 5%, only three cases in which output fell by at least 7% in one year (Finland in 2009, and Greece in 2011 and 2012), and none in which output dropped by more than 10%. In the rich world, clusters of large decreases in GDP appear on the heels of the 1973 oil crisis, during the Asian financial crisis of 1997-98, and as part of the global financial crisis and its aftermath.
A longer perspective reinforces the rarity of such events. Economic historians at the University of Groningen, in the Netherlands, maintain a cross-country set of GDP data stretching far into the past. Since 1870, across 18 industrialised economies, there have been only 47 instances in which a country experienced an annual decline in output of more than 10%. Most are associated with world wars and the Depression; of the 47 large output declines, 42 occurred between 1914 and 1945 (see left-hand chart).

How do countries fare after suffering such economic blows? Recoveries are occasionally quite rapid. At the end of the world wars, a few economies experienced near-immediate bursts of growth—partly, but not always, because of rebuilding. The beleaguered Italian economy grew by about 35% in 1946. By 1949 it had already recovered all the ground it lost during the war and then some. The German economy shrank by a staggering 66% from 1944 to 1946, then grew at an annual average rate of 12% over the subsequent decade. In other cases rebounds are less robust. In 1924 real output in both Germany and Austria remained below the levels before 1914. Across the period from 1870, it took an average of five years for output in countries that experienced declines in GDP of more than 10% to regain their peak (see right-hand chart).
Importantly, this reflects the fact that the main causes of economic contraction—world wars—persisted and disrupted activity for several years. French output fell by more than 10% per year in 1940, 1941, 1942 and 1944, for example. Yet focusing on more recent experience, and on smaller initial output declines of just 5%, does not dramatically change the picture. Among the rich economies which experienced annual drops in GDP of more than 5% since 1960, output took an average of four years to return to its previous level. Again, there are examples of immediate, robust recovery. By 1999, for instance, real GDP in South Korea had already risen well above the peak reached in early 1997, before the Asian financial crisis struck. Recoveries from the global financial crisis, in contrast, have been more sluggish. The Italian economy entered the covid-19 crisis having failed to regain the level of real output it achieved in 2008.

Catch the trade winds
Any lessons from these experiences should be applied to the world’s current situation with care. A dangerous pandemic working its way across a highly integrated global economy is an unprecedented event. Still, a few historical patterns are worth noting. First, and most obviously, the duration of the economic pain depends on how much goes wrong as a result of the initial shock. Germany and Austria fared worse than other first-world-war combatants because they lost the war and their empires, and suffered state collapse and hyperinflation. If countries today can survive massive output declines without sustaining much institutional damage, that bodes well for the pace of recovery.

Second, large drops in output often accompany a fracturing of global trade networks. The success with which those trade ties are restored matters for the robustness of the economic rebound. Western Europe enjoyed explosive growth in the years after the second world war, thanks in part to efforts to knit trade back together—a very different outcome from that following the first. Similarly, the world must hope that trade recovers quickly when the pandemic ebbs.
And third, it is important to get macroeconomic policy right. The global financial crisis, and the euro-area debt woes which followed, did not kill millions of people or destroy valuable infrastructure, but the sluggish recovery that followed left Europe both economically and politically vulnerable to new shocks.
Even the mildest brush with the coronavirus could prove economically destructive if governments are reluctant to provide enough stimulus. The world should be able to bounce back to growth once covid-19 is brought under control. It has only to avoid the errors of history.■
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This article appeared in the Finance and economics section of the print edition under the headline “From V to victory”
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How market panic can feed back to the world economy

FINANCIAL MARKETS have not endured a day as brutal as March 9th since the global financial crisis of 2007-09. Stockmarkets were a sea of red ink. The S&P 500 index fell by 7.6%. The FTSE 100—laden with oil firms, such as Shell and BP, and other natural-resource companies—suffered a similar drop. Investors rushed for the safety of government bonds. The yield on ten-year American Treasuries dipped below 0.5% for the first time ever. Investors sought other havens, such as the yen. Gold rose above $1,700 an ounce for the first time in seven years.
The backdrop, present for the past fortnight or more, is growing anxiety about global recession as covid-19 spreads. But the trigger for the latest burst of panic was a collapse in the oil price, following a meeting of OPEC ministers and other oil producers on March 6th. Russia (not an OPEC member) balked at cutting production to stabilise the price of crude. The response from Saudi Arabia, OPEC’s largest producer, was unexpected. It offered discounts to its customers and announced an increase in its output from next month. In effect, it launched a price war. Early on March 9th the price of a barrel of the Brent benchmark blend slumped by around a third, almost touching $31, before recovering a few dollars.

But why the panic? Cheaper oil ought to be a balm to the world economy. The oil-price spikes of the 1970s and early 1990s led to recessions because they transferred income from oil-consuming countries in the West to oil-producing countries in the Middle East. The consumers were forced to cut spending, but the producers saved much of their windfall. The net effect was to squash aggregate demand. So a sharp drop should act as a stimulus.
The logic these days is partly reversed. For a start, rich economies are a lot less dependent on oil; it takes far less oil to produce a dollar of GDP today than it once did. Still, the benefits of cheaper oil to consumers are not to be sniffed at. Next, America is once again a big producer of oil, so its economy suffers as well as gains when prices fall. The equation for other oil producers has also changed. Many of them spend freely when the oil price is high. So when prices fall, that element of global aggregate demand falls too.
Russia—the tactical target of Saudi Arabia’s price war—is different. Since 2014 it has run orderly monetary and fiscal policies. It has been a net provider of credit to the world, not a net borrower. And it has saved a lot of its surplus oil revenue for a rainy day, by basing its budget on an oil price of $40 a barrel. Middle Eastern and African producers (and never mind Venezuela) have not been as disciplined. Saudi Arabia itself needs $80 a barrel to balance the books.
Listed oil companies in America and Europe will endure a direct hit to profits if the oil price stays where it is. Much of the red ink on March 9th was spilled in listed oil stocks—which were out of favour even before the spread of covid-19. Yet what worries a lot of investors is the indirect impact of the latest market gyrations. Oil producers account for a big chunk of America’s high-yield (“junk”) bond market (see chart). As a method of squeezing high-cost American shale-oil producers out of the market, there is some logic to the Saudis’ move. An immediate effect of lower oil prices was a further tightening of corporate-credit conditions for the riskiest borrowers. A slug of investment-grade issuers—hoteliers and carmakers as well as airlines and oil firms—must also be at risk. Already there has been a trickle of ratings downgrades to junk. The more stressed markets become, the more credit will be withheld from those companies most desperate for cash to tide them over.

Few foresaw the Saudis reacting as they have to the collapse in oil demand induced by covid-19 and the failure to strike a deal with the Russians. Other surprises are surely lurking. Big falls in equity markets may beget yet further falls, as certain kinds of investors try to limit the volatility of their portfolios by switching into safer government bonds. Another worry is that offshore borrowers of dollars may find it hard to secure funding in future. Japanese banks and insurance firms have been voracious buyers of bonds in America and Europe. Were they to back away, credit markets would come under further strain. Much depends on measures to keep credit flowing. The Federal Reserve has already acted: on March 9th it offered to increase its lending to overnight money markets from $100bn to $150bn.
No end to the market turmoil is in sight yet. For things to stabilise, two things are required. First is a sign that the worst is past—clear evidence that virus infection rates in rich economies are peaking. Second, the price of risky assets, such as stocks and corporate bonds, must become cheap enough to attract bottom-fishing investors. Even to an optimist, these pre-conditions are weeks away. For now, panic reigns.
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Saudi-Russian price war sends oil and stockmarkets crashing

Editor’s note (March 9th 2020): This article has been updated to include market reactions
NO ONE KNEW exactly what deal would emerge from Vienna, but an accord seemed certain. Saudi Arabia and Russia, two of the world’s oil superpowers, had worked together since 2016 to control output and support prices. With oil demand plunging because of the spread of covid-19, the partnership seemed more important than ever to all producers. Members of the Organisation of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the undeclared leader, were keen to make a deal with allied oil producers, led by Russia. But on March 6th the meeting broke up without agreement, astonishing analysts and alarming investors.

When Russia refused to slash production, the Saudis promptly launched into a price war, offering discounts to customers and announcing an increase in output from next month. Brent crude, the global benchmark, tumbled in price from almost $50 a barrel on March 5th to below $32 on March 9th. The havoc did not stop there. In Asian trading Japanese shares fell by almost 6% and futures markets presaged even bigger declines in Europe, where Italy imposed an unprecedented lockdown on its wealthiest region. In America, the S&P 500 was 7% down in early trading, prompting a 15-minute suspension.
Investors flocked to the yen, a haven, and to government bonds. The yield on ten-year American treasuries fell below 0.5% for the first time. America’s Federal Reserve, which made an emergency cut in interest rates less than a week ago, is now expected to lower rates by a further percentage point by its April meeting, according to the futures markets. That would return the central bank to the zero-lower-bound on interest rates, where it was stuck from 2008 to 2015.
The meeting in Vienna of the so-called OPEC+ group was held amid much uncertainty. The full economic impact of covid-19 is still unknown. Traffic and production is picking up in most Chinese provinces, but infections in the rest of the world are multiplying. In a recent survey by Sanford C. Bernstein, a research firm, 55% of investors thought oil demand would fall outright in 2020 for only the third time in the past 35 years. Making price forecasts even trickier, Libyan oil production has plunged because of a blockade, but could rise suddenly. As OPEC and its allies gathered to agree on production levels, “they were absolutely shooting in the dark,” says Edward Morse of Citi, a bank.
Their blind cross-fire seems to have only added to the uncertainty and anxiety hanging over the world economy. In principle, extra crude production will help the many countries in the world that import oil, even as it harms producers. But the help tends to be diffuse, the harm more acute. Some oil importers, such as Japan, may not spend their windfall gains in full, whereas many oil producers are already overstretched. Countries like Iran, Libya and Iraq, which were in turmoil even before the outbreak of covid-19, may become even more desperate. Even Saudi Arabia requires an oil price above $80 to balance its budget, according to the International Monetary Fund.

The pain is not limited to national producers. ExxonMobil, a listed oil giant, has seen nearly $100bn wiped off its value since the start of January. And last year the number of North American oil and gas companies filing for bankruptcy jumped by 50%. As oil prices dive, that figure may soar higher still.
Could Saudi Arabia and Russia call off their price war before too many casualties mount? Their partnership has always been uncomfortable. Bitter rivals during the cold war, the two have also been at odds over the civil war in Syria, where Russian forces have intervened on the side of President Bashar al-Assad and, in effect, the pro-Iranian axis. As American oil production surged in recent years, Saudi Arabia and Russia performed an awkward pas-de-deux. Saudi Arabia would push for production cuts, Russia would resist, then agree at the last minute to curb output with the hope of boosting prices. But Russian oil companies griped about the cuts and were reluctant to comply with them.
In the most recent OPEC+ accord, in December, members agreed to curb output by 2.1m barrels a day to help offset rising production elsewhere. Such deals have supported the price of crude, but also ceded market share and propped up American shale. In 2018 America surpassed Saudi Arabia to become the world’s biggest oil producer.
Now Saudi Arabia’s strategy for OPEC looks as uncertain as it has in years. Prince Abdulaziz bin Salman became oil minister last year in part to ensure the kingdom’s allies would help support prices. In Vienna he pushed for an aggressive deal, announcing on March 5th that OPEC was seeking to lower output by a further 1.5m barrels a day. Russia balked. Now Saudi Arabia seems to be taking the astonishing step of driving prices downward. The biggest discounts—$8 a barrel—were offered to northwest Europe, to squeeze Russian crude in particular.
OPEC’s secretary-general, Mohammed Barkindo, said on Friday that talks will continue. But Saudi Arabia’s latest moves mark a dramatic escalation. The kingdom has long played the role of “swing” producer, raising or lowering output as required to keep prices stable. On March 6th, it swung the wrong way, toppling the world’s financial markets as it did so. The kingdom still wants to balance the oil market. But it does not want to do so by itself.
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Commodity economies face their own reckoning due to covid-19

THE REWARD for providing the world economy with the raw materials it needs to grow is perpetual vulnerability. The hyperglobalisation of recent decades, and the associated Chinese growth miracle, yielded large benefits to commodity producers of all sorts. Now, as the shock of the covid-19 pandemic works its way through the world’s new, tangled economic plumbing, commodity-dependent economies find themselves exposed. The dangers faced by this group—UNCTAD, a United Nations trade-and-investment body, classifies 102 economies as commodity-dependent—differ from those of countries wired tightly into manufacturing supply chains. For them, falling commodity prices instantly put a strain on public finances, just as the burden of coping with a public-health crisis is likely to increase.
Managing a commodity-based economy is never easy. When prices rise, governments must worry about excessive spending and financial risk-taking. When they fall, budgets bust and foreign investors take flight, even as the need for domestic spending and easy credit grows. Commodity exporters have faced more bad times than good of late. They have been battered by a slowdown in China’s materials-hungry economy, a shale revolution in America which upended global oil markets in the middle of the 2010s, and growth-sapping trade wars. The tide looked like it was turning late last year, as a trade detente between America and China lent support to an unsteady revival in global manufacturing. Scarcely had producers begun to hope for better times when covid-19 threw a sopping wet blanket on their fortunes.

Markets have fallen dramatically as the pandemic has gained strength. Soyabean prices are off by nearly 6% from January highs, copper by more than 10%, and oil by around 30%. Brent crude fetched $74 per barrel in April of last year and $69 as recently as January, but is now trading at around $52. Prices could fall further if the outlook for the economy deteriorates further, and travel and trade dwindle. Better news out of China, where the number of new cases of covid-19 continues to fall, is encouraging. The Chinese economy accounts for roughly half of global demand for industrial metals and more than 10% of global demand for oil. But a return to economic normality in China could be delayed by the boomerang effect of a spread of the disease elsewhere.
Tumbling prices hit government revenues at a time when higher government spending means public finances are already under strain in countries like Saudi Arabia. The IMF estimates the fiscal breakeven price of oil for many large oil-exporting economies—the price which balances the government’s budget—to be well above current levels: more than $100 a barrel in Algeria and Iran, for example, and over $80 per barrel in Saudi Arabia. Even Russia, with a breakeven price of about $42, may soon feel a squeeze. A recent IMF analysis of the economies of the Persian Gulf notes that while most built up savings as oil prices rose between 1997 and 2007, spending grew faster than revenue over the subsequent seven years. Fiscal reforms implemented between 2014 and 2018, when oil prices entered a prolonged slump, have helped, but most Gulf economies continued to draw down their sovereign-wealth funds and accumulate debt. As The Economist went to press, OPEC producers and allies such as Russia were meeting in Vienna to discuss ways to lift oil prices. Capital Economics, a consultancy, expected them to agree to an emergency output cut of 1m barrels per day for at least three months. Under stress, co-operation could prove short-lived.
Cutbacks in production because of sagging demand for raw materials also affect the strength of the domestic economy: there is less work, and less money to be spent on local goods and services. Growth forecasts are already being revised down for mineral-rich countries like Russia and South Africa. Analysts at Goldman Sachs, a bank, reckon that a 10% drop in commodity prices might shave more than a percentage point from GDP growth in Peru and Chile: both are exporters of industrial commodities such as copper that rely heavily on demand from China.
The rising fiscal pressure on commodity economies could hardly come at a worse time. Managing the viral threat will be expensive. The burden in some countries such as Iran, where almost 3,000 cases of the virus have already been confirmed, could be crushing. In other commodity-producing regions, such as Latin America and sub-Saharan Africa, far fewer cases have been confirmed as yet, and hot and dry climates could limit the virus’ transmissibility. But it is too soon to assume they will be unaffected.

Raw deals
A severe but temporary economic shock seems a perfectly reasonable excuse for a government to borrow more than planned. Commodity-based economies with a history of capable macroeconomic management can run larger deficits without fear of a market backlash; indeed, the yields on bonds issued by Australia have fallen sharply over the past month, reducing the cost of borrowing for a government grappling with a dual public-health and economic threat. Other big commodities producers will need to be more careful. In those with a history of recent financial stress, like Argentina and Venezuela, the covid-19 pandemic could pile misery upon misery. Brazil only recently escaped a cycle of fiscal incontinence, market scepticism and accelerating inflation.
Least predictable of all are the political effects of a potential pandemic. In good times, commodity wealth can blunt the complaints of political malcontents, while straitened circumstances expose all manner of ills. The slump of the past few years has already bred public disaffection across commodity economies, from Russia to Bolivia. The shock from covid-19 will test political systems around the world. Among commodity producers, especially those with little fiscal room for manoeuvre, fractures will be exposed more quickly and, occasionally, more destructively. ■
This article appeared in the Finance and economics section of the print edition under the headline “Material losses”
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Electronic platforms are challenging bond broker-dealers

ONE OF THE minor miracles of financial markets is that, in volatile periods such as these, sellers of securities can be readily matched with buyers. Though the direction of prices is uncertain, trading volumes are solid. Yet worrywarts say that while liquidity is plentiful at first when volatility rises, it cannot be relied on if markets stay jumpy for a while.
Corporate bonds cause the biggest headaches. A cheap and convenient way to hold them is via exchange-traded funds, or ETFs, low-cost vehicles that hold baskets of bonds and trade on stock exchanges. Part of the appeal of bond ETFs is the ease with which they can be bought or sold. But the corporate bonds held in such funds are typically less liquid than shares. Bonds are not as standardised; a company may issue them at varying maturities. Investors may still think they can sell them at a moment’s notice. There have long been concerns about a shortage of willing traders should the markets become stressed.

The broker-dealers who have traditionally stood between buyers and sellers of corporate bonds have scaled back their role as risk-takers (see chart). New forms of market-making are emerging. Slowly at first, and lately more quickly, the corporate-bond market is embracing trading on electronic platforms. Bloomberg is one of the main players. Another is Tradeweb, a venue favoured for the trading of government bonds. A third platform, MarketAxess, is the one best known for corporate-bond trades. A big question is, can such platforms make up for the diminution of old-school sources of liquidity?
Until 2008, the ease with which investors could trade corporate bonds relied on the willingness of big investment banks to hoard securities. These telephone-based dealers would buy bonds during periods of heavy selling and warehouse them for when investors were willing to bid for them again. But new rules since the financial crisis have made it expensive for banks to use capital for trading activities of any kind. The stockpile of corporate bonds they held dropped like a stone.
Enter the trading platforms. MarketAxess started 20 years ago as a way for pension funds and insurers to trade with the big dealer-brokers in an efficient way. After the financial crisis, it became clear that its clients needed something more. The firm started a programme to bring smaller, regional dealers and other liquidity providers into the fold. Individually none could match the muscle of the big Wall Street banks. But put them together and they provide meaningful liquidity for MarketAxess’s big clients. The firm has over 1,700 users, including mega-funds such as BlackRock and Legal & General. Volumes have risen for 11 years in a row. It handles a fifth of trading in investment-grade bonds in America. By far the fastest volume growth in the year to the end of February was in less-liquid securities, such as high-yield and emerging-market bonds.
The wonder is that it has taken so long for electronic trading to take hold in bond-land. It seems rather quaint that some deals are still brokered by traders with a phone glued to each ear. Screen-based trading is more transparent and far more efficient. But old habits die hard. A challenge for any platform—whether it is a dating website or an online-trading venue—is to persuade customers that there will be plenty of other customers to transact with. The barriers to “open trading” were high; traders were at first chary of advertising their bids and offers to all and sundry for fear that prices would move against them. But that has changed, says Rich Schiffman, head of Open Trading at MarketAxess. “They have come to realise that the benefits far outweigh the risks.” The more people who see your order, the better chance someone will fulfil it. Renewed market volatility might even attract more arbitrageurs to the platform.

Big tests lie ahead. Half of all investment-grade bonds have a credit rating of BBB. In a deep recession some of those bonds will be downgraded to junk. A lot of mutual funds can hold only investment-grade bonds. If big blocks of bonds have to change hands quickly, it might overwhelm the market’s liquidity. A lot rests on the further success of the electronic platforms.■
This article appeared in the Finance and economics section of the print edition under the headline “Match point”
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Share prices fall hard in recessions. It is tricky to take advantage

SAM SPADE, the detective in “The Maltese Falcon”, a crime novel by Dashiell Hammett, recounts a story of a missing-person case. Flitcraft, an everyman, is nearly killed by a falling beam. Confronted with the randomness of life, he decides—randomly—to vanish. After drifting for years, he settles into a new life much like his old one: marriage, kids, and golf at four. “He adjusted himself to beams falling,” says Spade. “And when no more of them fell, he adjusted himself to them not falling.”
The covid-19 virus has dropped from the sky, much like the girder that narrowly missed Flitcraft. Investors are shaken. Many are still adjusting to a world of falling beams. It will be a while before they adjust to them not falling. Meanwhile, the news on the economy gets worse. And bad economic news is generally bad for share prices.

If you are about to retire or derive your income from shares, this will hurt you. But there is a class of investor for which falls in asset values, or drawdowns, are an opportunity. Were prices to fall exactly in line with the value of lost profits, shares would be no cheaper. But in recessions, stocks tend to fall by a lot more than that. A clear-headed investor can pick up some bargains.
Economic downturns are—or should be—a fact of life for investors. A good working definition for them is a change to global GDP that causes a meaningful hit to the near-term corporate cashflows that shareholders lay claim to. A blow of this kind seems certain this year. But downturns eventually give way to recoveries. Only a fraction of firms will go bust. And equities are perpetual securities. The profits lost to recession can be thought of as an annual dividend cheque that got lost in the post and is not replaced. It hurts your wealth. But you are still entitled to payments stretching into the indefinite future. These account for most of a share’s value.
In principle, then, investors need not demand a big discount to hold stocks in recessions. But in practice they do. During the steep downturn of 2008-09, for instance, the S&P 500 index fell by almost 50% in the space of a few months. Although that was an especially brutal recession, it was not a drawdown for the ages. The peak-to-trough falls in earlier crashes were nearly as big. Clearly a lot of shareholders cannot look past the downturn. Call this panic, if you like, but it is all-too-human. When the beam hit the pavement beside him, Flitcraft “felt like somebody had taken the lid off life and let him look at the works”. Big drawdowns affect people in a similar way. Suddenly, risks seem to be everywhere—to your job, to your business, to your pension and your way of life. It seems imprudent to hold on to stocks.
The simplest, rules-based way to take advantage of lower stock prices is portfolio rebalancing. An investor who holds a portfolio split 50-50 or 60-40 between shares and bonds sells the bonds that have gone up in price, as interest rates fall, to buy shares that have fallen in price, and are now cheaper. She does this once a month or once a quarter to keep the weights constant. A bolder group of investors keeps cash in reserve so they can take advantage of bargain prices when the markets have turned away from risky shares. “There is a point when I say ‘this is getting interesting’,” says one investor. The threshold for “interesting” is a fall of at least 20%. For deep-value investors, it might be 40%.

A good stockpicker will have a watch list: a roster of company shares she would like to own should they become cheaper during the current sell-off. Market sages, tapping their nose, boast that they plan to load up on “quality stocks” at good prices when the stockmarket really tanks. If only life were that simple. Quality stocks (companies with a business model that is hard for rivals to emulate) started off dear and are only a little less so now. Meanwhile unloved value stocks, which sell for a low multiple of their profits, have become even cheaper. Such firms are in industries whose long-term prospects look bleak—banks, carmakers, oil firms and so on. Owning them has been an unrewarding experience. Their profits will be crushed by travel bans, supply-chain snarl-ups and the like. But their cheapness will push bolder investors to take a look.
Flitcraft was shocked to discover how random life can be. The hardboiled Sam Spade already understands this. Investors of the Spade kind know that beams fall, and they adjust to it. They also know that beams eventually stop falling. It is this that allows them to buy stocks when prices hit the pavement.
This article appeared in the Finance and economics section of the print edition under the headline “Penthouse to pavement”
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A recession is unlikely but not impossible

IF THE FINAL week of February saw financial markets jolted awake to the dangers of a covid-19 pandemic, the first week of March has seen policymakers leaping into action. The realisation that global GDP will probably shrink for part of this year, and the looming risk of a financial panic and credit-crunch, has led central banks to slash interest rates at a pace last seen in the financial crisis of 2007-09.
On March 3rd the Federal Reserve lowered its policy rate by 0.5 percentage points, two weeks before its scheduled monetary-policy meeting. Central banks in Australia, Canada and Indonesia have also cut rates. The European Central Bank and the Bank of England are expected to follow. If the money-markets are right, more Fed cuts are in store. A composite measure of the global monetary-policy rate, compiled by Morgan Stanley, a bank, is expected to fall to 0.73% by June, from 1% at the start of the year and 2% at the start of 2019.

Yet there is an uneasy feeling that a flurry of rate cuts may not be the solution to this downturn. In part that reflects the fact that they are already so low. A golden rule of crisis-fighting is that in order to be credible you should always have more ammunition available. In 2008-10 the global composite policy rate fell by three percentage points. Today, outside America, rich-world interest rates are close to, at, or below zero. Even the Fed has limited scope to cut much further—one reason, perhaps, why share prices failed to revive in the hours after its latest move.
The tension also stems from the peculiarity of the shock that the economy faces—one that involves demand, supply and confidence effects. The duration of the disruption mainly depends on the severity of the outbreak and the public-health measures undertaken to contain it. Given those uncertainties, policymakers know that while interest-rate cuts are an option, they also need fiscal and financial measures to help business and individuals withstand a temporary but excruciating cash crunch.
One way the virus hurts the economy is by disrupting the supply of labour, goods and services. People fall ill. Schools close, forcing parents to stay at home. Quarantines might force workplaces to shut entirely. This is accompanied by sizeable demand effects. Some are unavoidable: sick people go out less and buy fewer goods. Public-health measures, too, restrict economic activity. Putting more money into consumers’ hands will do little to offset this drag, unlike your garden-variety downturn. Activity will resume only once the outbreak runs its course.
Then there are nasty spillovers. Both companies and households will face a cash crunch. Consider a sample of 2,000-odd listed American firms. Imagine that their revenues dried up for three months but that they had to continue to pay their fixed costs, because they expected a sharp recovery. A quarter would not have enough spare cash to tide them over, and would have to try to borrow or retrench. Some might go bust. Researchers at the Bank for International Settlements, a club of central banks, find that over 12% of firms in the rich world generate too little income to cover their interest payments.

Many workers do not have big safety buffers either. They risk losing their incomes and their jobs while still having to make mortgage repayments and buy essential goods. More than one in ten American adults would be unable to meet a $400 unexpected expense, equivalent to about two days’ work at average earnings, according to a survey by the Federal Reserve. Fearing a hit to their pockets, people could start to hoard cash rather than spend, further worsening firms’ positions.
Modelling the resulting hit to economic activity is no easy task. In China, which is a month ahead of the rest of the world in terms of the outbreak, a survey of purchasing managers shows that manufacturing output in February sank to its lowest levels since factory bosses were first surveyed in 2004. It seems likely that GDP will contract in the first quarter for the first time since the death of Mao Zedong in 1976.

Forecasters are pencilling in sharp falls in output elsewhere (see chart 1). Goldman Sachs, a bank, reckons global GDP will shrink at an annualised rate of 2.5% in the first quarter. With luck the slump will end once the virus stops spreading. But even if that happens the speed and size of the economic bounce-back also depends on the extent to which those costly spillovers are avoided.
That is why central bankers and finance ministries are turning to more targeted interventions (see chart 2). These fall into three broad categories: policies to ensure that credit flows smoothly through banks and money markets; measures to help companies bear fixed costs, such as rent and tax bills; and measures to protect workers by subsidising wage costs.

Start with credit flows. Central banks and financial regulators have tried to ensure that markets do not seize up, but instead continue to provide funds to those who need them. On March 2nd the Bank of Japan conducted ¥500bn ($4.6bn) of repo operations to ensure enough liquidity in the system. The People’s Bank of China has offered 800bn yuan ($115bn, or 0.8% of GDP) in credit to banks so long as they use it to make loans to companies badly hit by the virus. Banks have been asked to go easy on firms whose loans are coming due.

Governments are also helping firms with their costs, the second kind of intervention. Singapore plans corporate-tax breaks, and rental and tax rebates for commercial property. Korea will give cash to small firms struggling to pay wages. Italy will offer tax credits to firms that experience a 25% drop in turnover. In China the government has told state landlords to cut rents and given private-sector landlords subsidies to follow suit.
The final set of measures is meant to protect workers by preventing lay-offs and keeping incomes stable. China’s government has enacted a temporary cut to social-security contributions. Japan will subsidise wages of people who are forced to take time off to care for children or for sick relatives. Singapore has announced cash grants for employers of affected workers.
Today these policies are being sporadically announced, and their implementation is uncertain. As the virus spreads, expect more interest-rate cuts—but also the systematic deployment of a more complex cocktail of economic remedies. ■
This article appeared in the Finance and economics section of the print edition under the headline “Sneezy money”
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