The starting point across economic areas was poor
Before analyzing the different policies taken to tackle Covid19, it is convenient to consider the starting point of the different major economies. The world economy, the United States and China have been on a steady growth trend since 2010. The Eurozone, over and above, suffered a second crisis during 2011 and 2012, and countries such as Spain or Italy, which are also the most affected by Covid19, did not show growth until 2013.
During 2019, the evidence of a global slowdown was clear in the major economies, with different situations across regions:
China reported its weakest annual growth in 29 years, 6.1% annual rate, in 2019, with significant expansive fiscal and monetary policies helping the main macroeconomic figures. Forecasts already showed a year-over-year growth to decline from +6% in Q4 2019 to -3.8 2020 Q1 (Lyu, Y., April 2020). Advanced and short-term indicators showed a weaker growth ahead, with some important indicators, such as manufacturing and service sector PMIs (Purchase Manager’s Index) from IHS Markit pointing close to contraction before Covid19 appeared (51.1 and 51.8, respectively, in January 2020, where 50 indicates contraction). In fact, State Grid China, the largest utility in the country, warned that China GDP was at risk of slipping to 4% in 2024 (Financial Times, January 15 2020), a signal of the possible structural weakness of the economy.
A key to understand why further expansionary demand-side measures may not be effective is to monitor the past.
Fiscal measures were already expansionary. The Chinese government deficit was 4.2% of GDP in 2018, 0.6 p.p. higher than in 2017, and 3.8 higher than in 2008. Chinese debt rose to 300% of GDP, a high indebtedness rate that has not been reduced during expansionary years (Ferrarini, B. et al, 2018). Chinese moderate economic slowdown was happening with a potent fiscal and monetary program in place, with the People’s Bank of China (PBOC) responding strongly by cutting reserve requirement ratios, injecting trillions of yuan in the economy, which led to increasing social financing, which jumped 14% to $3.7 Trillion in 2019).
The United States finished 2019 with 2.3% growth, which is a similar rate than in 2017, and the highest amongst developed regions. We must note that the Federal Reserve (FED) cut interest rates three times, leaving them in 2018 levels. Also, Government deficit reached 4.6% of GDP, increasing 0.8 p.p. during the year due to higher public spending. But the US growth was more solid than in the Eurozone and less dependent on the external sector. The labor market also remained solid, with the unemployment rate at 3.5%, active population increasing and no signs of weakness in economic activity. Monetary policy remained expansionary and the balance sheet of the Federal Reserve expanded to 24% of GDP.
The Eurozone was the main center of the economic slowdown in 2019. Some important countries, such as Germany or Italy were threatened by the shadow of technical recession during the third and fourth quarter of the year. The indicators of economic activity pointed out to downturn, and Covid19 worsened drastically the situation.
While Germany or Netherlands maintained the financial orthodox and registered fiscal surplus of +1.5% and 1.7%, and public debt of 56.93% and 48.6% of GDP, respectively, countries such as Spain, Italy or France registered higher deficits despite a sixth year of economic growth. In the eurozone, monetary policy remained highly expansionary, with the ECB balance sheet expanding to 40% of the eurozone GDP, negative deposit rates and an ongoing asset repurchase program.