Sunday Times, South Africa, 22 March 2020 by Duma Gqubule.
Gqubule is an economist
Think bigger, much bigger
The Reserve Bank’s rate cut was a timid gesture in the face of disaster. Like its global counterparts, it needs to go on a war footing,
A pandemic-induced recession fells an economy with right and left hooks
While the world is at war, with many countries ﬁring big bazookas — ﬁnancial market jargon for the bold measures taken to counter the economic impact of Covid19 — SA has responded with an interest rate cut equivalent to squirting a water pistol.
On Monday, UK Prime Minister Boris Johnson said: “We must act like any wartime government and do whatever it takes to support our economy.” During World War 2, the UK ran a budget deﬁcit of 20% of GDP for ﬁve years. Its debt-to-GDP ratio soared to 250%.
French President Emmanuel Macron says: “We are at war. We will implement everything we can to protect employees and French companies. Whatever the cost will be, we will do it.”
Olivier Blanchard, the former chief economist at the International Monetary Fund (IMF), says: “The world is de facto at war against the virus.” He points out that the US budget deﬁcit increased to 26% of GDP during World War 2. “Let us not be squeamish,” he says. Over the past month, advanced and developing countries have pursued two courses — public health measures to contain, mitigate and reverse the spread of the virus, and macroeconomic policy measures. A pandemic-induced recession is not a normal recession because it fells an economy with right and left hooks to its supply (or production) and demand (spending) sides.
There are similarities with a war economy, but there is more to a pandemic-induced recession. As Guardian columnist Aditya Chakrabortty says: “The essence of our economic problem is easily summed up: to contain this disease, the economy must grind to a halt.” Also, billions of people throughout the world now face what Macron calls “life in slow motion”. This is something that has not happened in my lifetime or that of my parents.
This means that there is a limit to which traditional macroeconomic policies can address the problem. US Federal Reserve chair Jerome Powell says: “An interest rate cut can’t reduce the infection rate. It can’t ﬁx a broken supply chain. We get that.” Australian modern monetary theory economist Bill Mitchell says: “This is a very special type of calamity that doesn’t ﬁt the usual types of shocks that economies endure. It makes the task of designing an economic policy response more difﬁcult.” Despite the constraints, Powell still thinks that traditional monetary policies can provide a meaningful boost to the economy.
These complexities partly explain the irrational behaviour of world stock markets. Mitchell says: “The unseemly ﬁghts in supermarkets over toilet paper (or chicken, as I am informed from Spain) are another version of the brain-snap share market selloffs in recent days.”
As global Covid-19 deaths rise past 11,000, the world is at a crossroads, with many countries ready to do whatever it takes and ditch orthodox policies to prevent an economic collapse.
The Organisation for Economic Co-operation and Development says world GDP growth will decline to 2.4% in 2020 from 2.9% in 2019. The IMF deﬁnes a global recession as GDP growth of less than 2.5%. As a result, central banks have made 64 cuts in interest rates since the beginning of March 2020. The US Fed led the way with two emergency cuts in interest to a range of 0%-0.25% and announced plans to pump $700bn (the equivalent of about R12.3trillion on Friday afternoon) into the economy in a resumption of the quantitative easing policies that were implemented after the global ﬁnancial crisis of 2007–2009. The European Central Bank (ECB) announced a $1.2-trillion quantitative easing programme until the end of the year. Many central banks have provided facilities for small and medium enterprises.
On ﬁscal policy, governments have implemented two types of interventions: economy-wide increases in government spending and so-called “timely, targeted and temporary measures” to address the plight of vulnerable companies, households and people, the casualties at the frontline of the war against Covid-19. These include small and medium enterprises and casual employees in the retail, hospitality and tourism sectors.
The US is reportedly planning a ﬁscal stimulus of more than $1-trillion that could involve a “helicopter drop” of $1,000 for every citizen. At the end of last month, all Hong Kong citizens received a cash payout of $1,300. Numerous other governments in advanced and developing countries have announced massive ﬁscal stimulus packages. The Financial Times reports that targeted measures implemented by European countries include mortgage and debt repayment holidays, state loans and credit guarantees, income subsidies for affected workers, tax deferrals and social security payment deferrals and subsidies.
For example, the UK will provide loans and loan guarantees of $390bn for affected businesses. A similar scheme in France will offer $320bn. Italy has suspended mortgage and interest payments for three months. Denmark will cover 75% of the salaries of affected workers. France has deferred taxes for affected businesses. Other countries have provided for extended sick leave pay for affected workers. In SA, the economy had a “lost decade” in terms of economic development between 2009 and 2019 when per capita GDP barely increased. There have been ﬁve consecutive years of declining GDP per capita. The country has had three recessions over the past decade.
It has had two recessions in two years since Cyril Ramaphosa became president. During this period, there have been six out of eight quarters of declining investment, despite two summits where companies allegedly pledged R600bn. There have been ﬁve out of eight quarters of declining GDP. Unemployment has increased by 1-million people.
Before the Covid-19 outbreak spooked world stock markets, the country was already expected to record the third consecutive quarter of declining GDP during the ﬁrst three months of 2020, partly due to loadshedding. The Reserve Bank has forecast that GDP will decline 0.2% for the whole of 2020. Given the Bank’s sorry track record of forecasting GDP growth, we should assume that the contraction will be more severe. The country could be heading for a depression. This is a truly dismal economic record, whichever way one slices the data.
The government has treated Covid-19 as just a public health crisis and provided no macroeconomic policy measures to counter its impact. There is no alternative, except to ditch the orthodox economic policies that have failed SA for so long and introduce a significant monetary and ﬁscal stimulus, which will include economy-wide and targeted measures. This week’s interest rate cut of 100 basis points was a case of too little, too late, given the scale of the economic crisis, but just enough to prevent a public stoning.
We need more aggressive interest rate cuts and a ﬁscal stimulus of at least R600bn over the next three years. A sovereign nation that issues its own currency cannot fail to meet its own obligations in its own currency unless it chooses to do so. The Bank must have a wider range of policy tools than just setting interest rates. Like other countries, a developmental central bank can use other policy tools to grow the economy.
It can provide monetary ﬁnancing of government spending, purchase government bonds in the event of a ratings downgrade or instability in bond markets, and recapitalise development ﬁnance institutions.
It can also provide developmental windows — at cheap interest rates like the ECB and the Bank of England — for banks to lend to small and medium enterprises or other priority sectors. Bank governor Lesetja Kganyago says such policy tools can only be used when the interest rate is at zero. But that is the equivalent of a child who decides to make up his or her own rules during a crazy eight-card game.