We are in a half-open, half-closed netherworld that makes it hard to unwind emergency stimulus
After pocket lockdowns, get ready for pint-sized recoveries.
From Tokyo to Miami, authorities are imposing localised curbs on social and commercial life in an attempt to constrain resurgent waves of the coronavirus without locking down completely. Targeted mini-measures were designed to avoid the devastating contractions of the last quarter, yet they are inevitably undermining the return to economic health. That reality was borne out in Federal Reserve Chairman Jerome Powell's dour view of the world economy this week.
Japan's expansion will be shaved by an annualised 0.8 percent should a surge in Tokyo Covid-19 infections prompt renewed domestic travel limits, Goldman Sachs Group Inc warned last week. That prospect would bear out Bank of Japan Governor Haruhiko Kuroda's caution that, after an initial spurt, the rebound will slow. China, the first major economy to reopen after a deep freeze, lost momentum this month. India's struggles will probably warrant another interest rate-cut next week; some form of debt monetisation is conceivable this year.
The longer economies are in a netherworld of half-open and half-closed, the harder it is to unwind emergency stimulus programs. Many were framed as a response to a temporary phenomenon – a way to put a floor under activity during the pandemic. It was implicit that things would be on the mend in the second half. They are mending, it is true, but slowly and unevenly. A double-dip recession is not out of the question.
It was not supposed to be this way. Remember the talk of a V-shaped recovery? That has an archival feel by now. Economies may not neatly resemble any shape until a vaccine is widely available or society finds a way to responsibly distance and live with the pandemic — or a combination of both. In a press conference on July 29, Powell described a few phases to the pandemic, "The first was the lockdown with the accompanying collapse in growth and rollout of massive stimulus; the next is the reopening, which we are in."
Powell was at pains to say that the success of this phase depends on the virus, masks and distancing. There is no doubt the recovery has slowed; from a policy perspective, "we are in this until we are well through it," he said.
The case for prolonged monetary and fiscal infusions is straightforward when you have the world's reserve currency and deep domestic capital markets on your side. Spare a thought for economies in Asia that do not hold those aces.
Outside Japan, central banks have engaged in varying degrees of quantitative easing and bond purchases to support markets since the pandemic erupted. These range from yield-curve control in Australia; QE in New Zealand; vague noises about QE in South Korea; piecemeal asset purchases in Thailand; and outright debt monetisation in Indonesia. Japan never stopped QE, even in fairly good times.
The Philippines has tried to steer a middle course between Thailand and Indonesia without making a fuss about it, a fudge that may not be sustainable. Thailand has one of the direst outlooks in Asia, given the collapse of tourism. A new course must be tempting, if not desirable, as I wrote with Clara Ferreira Marques here.
Whatever their pandemic response — blanket or targeted — or their economic approach, countries cannot avoid paying a price. The only thing that will remove the pain for Asia is beating the pandemic. As Powell knows.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement