Published 12:39 IST, February 26th 2020

Coronavirus poses tough challenge for economic policymakers

The fast-moving coronavirus isn’t just confounding health officials. It’s also bedeviling policymakers and central bankers who are struggling to assess the economic damage from an outbreak that’s reached 37 countries and territories, infected 80,000 people and killed 2,700 worldwide.

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WASHINGTON — fast-moving coronavirus isn’t just confounding health officials. It’s also bedeviling policymakers and central bankers who are struggling to assess ecomic dam from an outbreak that’s reached 37 countries and territories, infected 80,000 people and killed 2,700 worldwide.

y don’t kw where or how fast virus will spre. y can’t draw on clear precedents to consider what to do. And tools y rmally use to fight ecomic slumps — interest-rate cuts, government spending hikes and tax relief — eir might t work very well, lack bro support or carry ir own risks.

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If y overreact, policymakers can cause self-defeating panic. Yet if y respond too slowly or timidly, y risk having ecomic dam deepen and spre.

Stock markets tumbled and bond yields sank Tuesday for a second day on rising fears that COVID-19 and quarantines being imposed to fight it are obstructing global supply chains and could derail corporate earnings and global ecomy. Dow Jones industrial plunged 878 points — 3% — after plummeting more than 1,000 points Monday, sharpest drop in two years.

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“This outbreak will have a significant effect on worldwide demand for tourism, travel, and or services, while supply chain disruptions and increased uncertainty will hurt current production as well as investment,” said Eswar Pras, a Cornell University ecomist. “ timing of outbreak is especially unfortunate ... Europe and Japan are flirting with recession while China and India h been losing growth momentum.”

Mark Zandi, chief ecomist at Moody’s Analytics, said that European Central Bank has little ability to counteract a recession. It has pushed its benchmark interest rate into negative territory, to -0.5%, and is alrey purchasing government bonds in an effort to lower longer-term interest rates.

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“What is policy response in Europe?” Zandi asked. “re is ne.”

At that point, with so many ecomies overseas struggling, U.S. will likely suffer a hit just from overseas slowdown. “With entire global ecomy in recession, that likely means we are going to get pretty close to one,” Zandi said.

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Carine Mann, chief ecomist at Citi, said financial services giant has cut its forecast for global ecomic growth this year to 2.5%, weakest pace since Great Recession more than a dece ago.

When virus began grabbing helines last month, most ecomists were relatively sanguine about ecomic dam it could cause. y predicted a repeat of what happened when SARS outbreak hit China and its neighbors in 2003: A short-lived blow to ecomic output, followed by a relatively quick rebound.

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But virus has proved virulent and fast-moving. one expected virus to slam countries as far-flung as Italy and South Korea. And quarantines and lock-downs that governments have imposed to try to stop outbreak have brought business to a standstill in hard-hit places such as Chinese industrial hub of Wuhan, a city of 11 million where COVID-19 originated.

What happens in China carries far greater ecomic weight than it did 17 years ago. Back n, China accounted for just 4% of global ecomy. w, it’s 16%. And its factories and warehouses are deeply integrated with rest of world, supplying toys, shoes, cellphones to importers around world.

“This is unprecedented,” said Sung Won Sohn, an ecomist at Loyola Marymount University in California. “That’s one of reasons we cant really say this will be ar SARS.’’

Policymakers have deces of experience fighting tritional downturns. Typically, consumers and businesses lose confidence. y become reluctant to spend and invest, potentially creating a self-fulfilling downward spiral.

In response, governments can inject money into public works projects or approve sharp tax cuts. Federal Reserve and or central banks can slash interest rates. Given eugh of a financial incentive to borrow and spend, consumers eventually will open ir wallets. And companies will hire, buy equipment and open new factories, offices and shops.

So revving up demand is something policymakers are used to. But this time, y don’t have a go-to remedy for kind of supply shock that coronavirus is causing -- lockdown of factories in China and elsewhere that is cutting off flow of raw materials and finished products to customers around globe.

“Fed policy can’t fix that,” said Joe Brusuelas, chief ecomist at tax visory firm RSM.

virus and health measures that are meant to combat it are depressing consumer demand. Families quarantined in Wuhan and elsewhere tend to “stay at home and cut back on discretionary spending for eating, recreation and travel,” said ecomist Paul Sheard, senior fellow at Harvard Kennedy School.

“A big looming shock calls for an early and aggressive policy response, but such a response could turn out to be unnecessary and look panicky,” Sheard said. On or hand, if COVID-19 continues to inflict dam, “policymakers who take an irdinate wait-and-see approach will look to have been heavy-footed and complacent in retrospect.’’

So far, Fed has chosen to monitor health crisis and its ecomic fallout and hold off on any decision to cut rates below ir alrey low levels. Its cautious approach is beginning to draw criticism from some.

“y need to be proactive,” said Loyola Marymount’s Sohn.

Fed officials have me clear that y are closely monitoring impact of virus but do t yet have a clear handle on its current or potential impacts.

“I’m really a data wonk, I’ll look at anything that moves,” Richard Clarida, vice chair of Federal Reserve, said Tuesday at an ecomics conference. But he ded that it is “still too soon to even speculate about eir size or persistence” of coronavirus’ effects.

Loretta Mester, president of Federal Reserve Bank of Cleveland, said Monday that Fed will keep in close touch with ir business contacts to see how disease affects ir sales and outlooks. That may be where y see first signs of an impact.

Fed reduced rates three times last year, leaving its benchmark rate in a low range of 1.5% to 1.75%. re’s little more room to cut. Likewise, government has alrey enacted tax cuts and spending increases that have put nation on track to record its first $1 trillion budget deficit in eight years.

“re really isn’t much we can do in terms of fiscal policy,” Sohn said. “Our deficits are so high, and it takes time for Congress to act. I’m t expecting much from ministration.”

Larry Kudlow, President Donald Trump’s top ecomic viser, however, promised Tuesday that “we will be rey with a number of measures, emergency measures, common sense measures” if virus’ “contagion rate picks up.”

12:39 IST, February 26th 2020