Regulators ready to act as OECD sounds alarm on coronavirus impact

Pedro Gonçalves
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Regulators ready to act as OECD sounds alarm on coronavirus impact

Global central banks promised to act as needed to mitigate the economic impact of the coronavirus as the OECD warned the outbreak could cut global economic growth in half and plunge several countries into recession this year.

The Paris-based group lowered its central growth forecast from 2.9% to 2.4%, but said a "longer lasting and more intensive coronavirus outbreak" could slash growth to 1.5% in 2020. It also said the world economy faces its "greatest danger" since the financial crisis more than a decade ago and said a "long lasting" epidemic would risk a worldwide recession.

Against a backdrop of already weak GDP growth, the economies of Japan and the eurozone could slide into recession this year, it added, while warning that failure in the UK's post-Brexit trade talks with the EU also represented a significant downside risk.

We are vigilant, we are mobilised, but we will remain calm and proportionate in the responses that must be provided"

The OECD called on governments to act "swiftly and forcefully" to combat the health and economic effects of the virus, calling for supportive monetary and fiscal policies to restore confidence.

With alarm bells ringing, governor Haruhiko Kuroda said the Bank of Japan will "strive to provide ample liquidity and ensure stability in financial markets." The Bank of England followed by saying it's working with UK and international authorities to "ensure all necessary steps are taken to protect financial and monetary stability."

Luis de Guindos, vice-chairman of the European Central Bank, said the ECB remained "vigilant and will closely monitor all incoming data" while underlining its standard guidance that it "stands ready to adjust all its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner".

François Villeroy de Galhau, governor of the Banque de France, said in a radio interview: "We are vigilant, we are mobilised, but we will remain calm and proportionate in the responses that must be provided."

In Brussels, Paolo Gentiloni, the EU's economics commissioner, said there would need to be a timely co-ordinated fiscal response to the coronavirus outbreak. Please use the sharing tools found via the share button at the top or side of articles. 

"It needs to be very timely. You can't take it too early, you can't take it too late," said  Gentiloni, adding that a "fiscal response cannot be an exhaustive answer" but could still prove very useful. "It is time to declare that the EU is ready to use all the available policy options as and when needed to safeguard our growth against these downside risks," he said. "This is time for solidarity, it is time to build confidence, it is time to act."

On Friday, Federal Reserve chairman Jerome Powell opened the door to cutting interest rates to contain what he called the "evolving risks" to economic growth from the virus.

Economists at Goldman Sachs predicted the Fed will ultimately slash by 100 basis points in the first half of the year. The BOE will cut by 50 basis points and the ECB by 10 basis points, it said.

"Global central bankers are intensely focused on the downside risks," Goldman Sachs economists led by Jan Hatzius said in a report on Sunday. "We suspect that they view the impact of a coordinated move on confidence as greater than the sum of the impacts of each individual move."

The prospect of central banks' action temporarily halted the worst rout in stocks since that crisis. But the selloff resumed on Monday, with US futures falling and Treasuries rallying.

"The optimism seen at the outset today in response to moves by central banks to provide support to markets already looks to have been all but wiped out following the OECD's warning shortly afterwards," Adrian Lowcock, head of personal investing at investment platform Willis Owen.

"The OECD has said that a ‘longer lasting and more intensive coronavirus outbreak' could cause economic growth to halve in 2020,  to just 1.5%, and markets are now heading back down in reaction.

"For investors it means putting up with a lot more volatility to come - this event is unfortunately far from over and trying call when to buy and sell in the face of such an unknown event is virtually impossible. While many stocks look cheap now, they could get a lot cheaper before this crisis is over."

Since the outbreak in January, close to 85,000 people have been infected worldwide, with a fast-rising share of these outside China.

Italy has been hardest hit so far in Europe at a delicate moment for the nation, with the eurozone's third largest economy already shrinking. On Sunday, the Italian government announced plans to inject €3.6bn into the economy.

 

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