Policies Try to Keep Pace with the Pandemic, Coronabonds Test Europe, Paycheck Protection Pandemoniu


  • Elevators and Staircases
  • Coronabonds Reopen Europe’s Divide
  • Paycheck Protection Pandemonium

Before “normal” was redefined by COVID-19, I spent a fair amount of time traveling to give presentations. (So much, in fact, that my wife used to joke that I should change my address to the airport, because that is where I seemed to live for much of the year.) I enjoy meeting people and listening to what they have to say. I often learn more from their insights than I do from official economic reports. And it is rewarding to help a few of them understand what is going on a little bit better.

Like many of you, I have been confined to my quarters by the pandemic. And I am finding that as much as we frequent flyers complain about aspects of life on the road, I miss it. I miss being on the move and meeting people in person. We’re doing our best to soldier on with webinars and teleconferencing, and we hope these commentaries are keeping you abreast of a rapidly changing environment.

Among the things I do not miss about traveling are broken conveyors. If an elevator or escalator is out of service (not at all uncommon), I must carry my rollaboard up the steps. My bag weighs quite a bit during weeklong trips, and the ascent can be challenging.

I was thinking of that metaphor as I contemplated the global economic outlook this past weekend. Things have been happening with such speed that it has been hard to forecast with any confidence at all. But one centering principal is likely to govern what’s ahead: economic activity typically descends by elevator, and recovers on the stairs.

The charts below show the progression of growth and unemployment during the recently concluded business cycle.

Weekly Economic Commentary - 04/09/20 - Chart 1

Across countries, declines in economic fortune are sharp, and recoveries gradual. These patterns exist because businesses are often quick to retreat and slower to re-engage. Because they set payrolls to match their expectations, the labor market also recovers gradually. And because the labor market drives income and consumption, gross domestic product (GDP) can take some time to return to its former levels after a downturn.

Policy measures attempt to change the shape of these trajectories. Direct government spending can replace flagging private demand during recessions. Monetary measures can make credit cheaper and easier to access. The key to bending the slope of the recovery curve is implementing policies that are properly designed and properly scaled. The economic paths different regions follow are a function of their structures and the steps they take to support activity.

“It may take much longer than expected for economic activity to get back to normal.”

The current economic situation is complicated by another curve, the one that captures the advance of the pandemic. While confirmed cases are peaking in Western Europe, they are still rising in the United States, the United Kingdom and Japan. And as we discussed last week in the context of India, cases are just now taking root in some of the world’s biggest emerging markets.

According to the figures it shares, China is on the other side of the contagion curve and is reopening its factories. The challenge it will face in the months ahead is that export demand is likely to be severely curtailed, meaning that much of its industrial output could sit in inventory until the West begins to recover.

Weekly Economic Commentary - 04/09/20 - Chart 2

The normalization of commerce depends critically on two sets of decision makers. The first are public health officials, who have implemented increasingly restrictive social distancing measures. They, too, are quick to become conservative and slow to relax. Some areas have quoted April 30 as a decision day, but during the past two months, we have persistently underestimated the ability of the coronavirus to spread. Some places may spend the whole summer awaiting an all-clear.