Is the global economy heading towards a recession?
March 16 2020 08:49 PM
Dr R Seetharaman
Dr R Seetharaman

By Dr R Seetharaman

The novel coronavirus and its impact on global economic growth, including emerging economies and the fall in oil prices sent the global capital markets crashing last week.

The emerging economies also were part of this mayhem and they also witnessed weakening of their currencies. The first quarter bond issuances in emerging economies had also fallen on account of the above factors. On the whole, the emerging economies’ financial markets are going into a tailspin and volatility is expected to continue in the near term.

In response to the volatile financial markets, the People’s Bank of China last week injected $79bn into the economy through a reduction in reserve ratios for banks. India’s RBI announced a $2bn injection into the foreign exchange market last Thursday to support the rupee, and followed on Friday with a plan to add liquidity through short-term repurchase operations. There was some relief to the markets.

On Sunday, the US Federal Reserve announced it would drop interest rates to zero and buy at least $700bn in government and mortgage-related bonds as part of a wide-ranging emergency action to protect the economy from the impact of the coronavirus outbreak. The benchmark US interest rate is now in a range of 0 to 0.25%, down from a range of 1 to 1.25%. In addition to rate cuts, the Fed announced it is restarting the crisis-era program of bond purchases known as “quantitative easing,” in which the central bank buys hundreds of billions of dollars in bonds to further push down rates and keep markets flowing freely. The Fed is also giving more-generous loans to banks around the country so they can turn around and offer loans to small businesses and families in need of a lifeline.

The Bank of Japan (BoJ) said it would buy more assets including exchange-traded funds and corporate bonds, and offer a new zero-interest rate loan program to ensure companies had the financing they needed, to help prop up sentiment and maintain stability in markets. Under active buying of ETFs, the central bank will be able to buy at an annual pace of up to ¥12tn, double the annual target of about ¥6tn, suggesting more aggressive purchasing in the near-term.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced during the weekend a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements. These central banks have agreed to lower the pricing on the standing US dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the US dollar overnight index swap (OIS) rate plus 25 basis points.

To increase the swap lines’ effectiveness in providing term liquidity, foreign central banks with regular US dollar liquidity operations have also agreed to begin offering US dollars weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered.

Brazil’s central bank meeting is happening this week and it may come up with policy actions.

The weakening of Russian rouble could pose inflation risks for Russia. Earlier the Russian central Bank had cuts key policy rate to 6% from 6.25% in February 2020. We need to see what action is coming from them.

The global growth has been brought down by the IMF to 3.3% in Jan 2020 from 3.4% in October 2019. At the recent G20, finance ministers and central bank governors agreed to use all available policy tools, including fiscal and monetary measures as appropriate to respond to the economic impact of Covid-19. The G20 also agreed to support the IMF and World Bank commitments to extend financing to developing countries that need it and invite countries to strengthen funding facilities. They are committed to addressing the disruptions to international trade and market uncertainty due to the pandemic.

The global economy could possibly be heading towards a recession if the coronavirus problem persists, and to prevent the same, various central banks have taken actions recently to improve liquidity in the near term and to revive growth in the long term. The above actions prevent both liquidity and funding crisis. In the light of above developments due to novel coronavirus, it is quite possible that the global growth could be revised downwards by the IMF in its April 2020 forecast.

* The author is Group CEO of Doha Bank.

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