June 4, 2020: Macro policy easing responses to the coronavirus crisis have reached unprecedented levels, with direct fiscal stimulus measures totalling USD 5trillion (7% of 2019 GDP) for the “Fitch 20” countries covered in its Global Economic Outlook (GEO).
“The scale of fiscal easing announced to date, which could increase further, is significantly larger than the fiscal response seen after the global financial crisis, when the advanced economies saw a fiscal easing of around 3%-4% of GDP. Massive policy easing will undoubtedly help the pace of the post-crisis economic recovery,” said Marina Stefani, Director at Fitch Ratings.
Central bank responses have been similarly impressive – with new quantitative easing (QE) asset purchases expected to reach 20% of GDP in the US, 9% in the UK and Canada, and more than 7% in the eurozone – and a wide array of new credit facilities. The ECB could also further increase its bond-buying programme.
“Responses to the crisis have, however, been strikingly uneven, with developed-market countries within the Fitch 20 set to spend an aggregate USD7.6 trillion (11% of 2019 GDP) in overall fiscal-support measures (including guarantees and quasi-fiscal measures), while emerging-market economies have announced a modest USD1.2 trillion (1.8% of 2019 GDP),” added Stefani.
Responses vary: from direct fiscal support to households and businesses to government-granted fiscal guarantees or quasi-fiscal measures borne by public agencies. Various central banks have adopted monetary easing, asset-purchase programmes, and the launching of new liquidity or refinancing facilities to support the real economy including via the banking sector. The speed and size of macro policy easing will influence both the intensity of the immediate coronavirus-related macro shock and the pace of the post-crisis economic recovery.
Fitch's Economics team has compiled a summary of the fiscal and monetary instruments that the Fitch 20 countries have adopted to help inform its economic forecasts released in its Global Economic Outlook. Our analysis does not incorporate the various macro-prudential easing measures announced in response to the crisis but which will also support the economy.
Using a broad definition of fiscal support including direct fiscal-easing measures and guarantees, Germany, Italy and the UK each have announced more than 20% of GDP overall fiscal support, followed closely by France (17.5%).
For the largest four eurozone countries, as well as for the UK, more than 70% of the total fiscal response is composed of government guarantees. Direct fiscal measures in Europe vary from around 3% in Spain and Poland to 4.5% in France and Italy, 5.5% in the UK and 8% in Germany. The European Commission has proposed a EUR750 billion EU joint fiscal package (6.3% of eurozone GDP) to finance the recovery, but this has yet to be agreed at the EU member state level and we have not included it in our analysis.
The US also has announced an enormous stimulus package and established a wide range of support instruments. Direct fiscal easing exceeds that announced so far in Europe, at 11.5% of GDP, although the scale of new federal fiscal guarantees has been smaller, at 2.4% of GDP. Similarly, Japan has announced a large support package and Fitch estimates that actual new discretionary measures, guarantees and quasi-fiscal measures adopted by the government will account for 32.3% of GDP.
Central banks in developed economies also have unleashed a salvo of monetary and credit stimulus. The Federal Reserve has deployed the largest monetary apparatus amongst all DM countries, with a pledge of unlimited asset purchases and the creation of 14 new liquidity facilities to support the real economy and the banking sector. We expect new QE purchases of government bonds and mortgage-backed securities to exceed USD4 trillion in 2020.
Newly announced QE purchases have also been announced in the eurozone, the UK, and for the first time Canada and Australia. The Bank of Japan has also increased the frequency of government bond (JGB) purchases and has extended targeted purchases of corporate bonds/commercial papers and Exchange Traded Funds. Central banks have also launched new extensive credit facilities to support the real economy and the financial sector, ranging from 5% of GDP in Australia to about 10% in Japan and the US, and almost 13% in Canada.
In emerging markets, the policy response has been more restrained in most countries, with the exception of Brazil, Poland and South Africa, which have adopted large fiscal packages in response to the pandemic (7% of GDP in South Africa; 9% in Poland; 16.6% in Brazil). New discretionary fiscal measures and new refinancing and liquidity facilities account for less than 2% of GDP in Mexico and India, while the Russian response appears modest given the country's fiscal flexibility relative to its EM peers. China's fiscal response has been more muted than other large economies at around 5% of GDP and credit easing has been far smaller than in 2009.
One common feature of the EM policy response to the crisis was widespread interest rate cuts, despite large currency shocks across the board, with sharp cuts in Turkey, South Africa, Mexico, Brazil and India. Several EM central banks have also initiated bond-buying programmes, although the scale of an asset purchase is limited and the focus is on market stabilisation rather than boosting lending.