COVID-19 Epidemic: Global Rate Cuts; OECD Downgrades Economic Growth Forecasts

US Fed also slashed rates by 50 basis points to 1 to 1.25% in an attempt to protect the economy from slowdown and maintain optimum inflation and employment scenario.

The central banks intend to protect the nation’s economy from the financial fallout of the coronavirus epidemic, which has clouded the near-term outlook for the global economy.

In its interim economic assessment, Organisation for Economic Co-operation and Development or OECD has lowered the global growth projections by about 0.5 percentage point for 2020 in comparison to that anticipated in the November 2019 Economic Outlook.

As per the economic organisation, the output contractions in China can be sensed worldwide, owing to China’s significant role in global supply chains, commodity and travel markets.

Coronavirus to Wipe Off 0.5 Percentage Points from Australia’s Economic Growth, Expects OECD

The OECD expects the coronavirus outbreak to wipe off 0.5 percentage points from Australia’s economic growth in 2020, anticipating 1.8 per cent growth rate this year.

The organisation has made downward revisions to the economic growth rates of all the G20 economies for 2020, considering adverse impact of the disease on the travel sector, financial markets, confidence and the disruption to supply chains.

Countries strongly interconnected to China, like Korea, Australia and Japan are likely to be hardest hit by the economic fallout of the coronavirus. However, the economies less heavily integrated with China, such as the United States and Canada, are anticipated to experience relatively mild effects of the coronavirus outbreak.

The coronavirus outbreak has considerably weakened near-term global economic outlook, particularly in China, wherein the tentative signs of a mild improvement towards the end of February appear unlikely.

As China plays a key role in global supply chains as a manufacturer of intermediate goods, especially in electronics, transport equipment, computers and pharmaceuticals, the production falls in China have been promptly felt by businesses across the world. Moreover, the cancellation of many planned visits, business events, leisure events and flights, and travel restrictions have been impacting numerous service sectors.

The OECD has revised down prospects of China markedly in 2020, projecting GDP growth rate to remain under 5 per cent in 2020. However, the organisation has anticipated a pick-up in growth to 6.25-6.5 per cent rate in 2021, level broadly in line with the one expected in the absence of coronavirus outbreak.

Coronavirus Having a Significant Impact on Australian Economy, says RBA

As per the RBA, the coronavirus is currently having a considerable impact on the nation’s economy, especially in the travel and education sectors. Expecting an impact of the disease on domestic spending, the central bank anticipates Australia’s GDP growth in the March quarter to be weaker than its earlier projections.

Amidst the coronavirus outbreak, the long-term government bond yields have reduced to record lows in several countries, including Australia. In addition, the AUD depreciated further, reaching to its lowest level seen in many years.

Though it is difficult to anticipate how long-lasting and large the effect of coronavirus will be on the nation, the central bank expects the Australian economy to return to a rising trend once the coronavirus is contained.

The bank’s positive outlook is backed by high levels of spending on infrastructure, the prevailing low level of interest rates, a positive outlook for the resources sector, the lower exchange rate and expected recoveries in household consumption and residential construction.

However, the bank anticipates coronavirus to delay Australia’s progress towards the inflation target and full employment.

ALSO READ RBA Stays Optimistic Over Economic Outlook, Considers Coronavirus Outbreak a Near-Term Risk

Policy Actions Needed to Contain the Spread of Coronavirus

As per the OECD, co-ordinated policy actions are needed across all the major economies to contain the spread of coronavirus. In economies most affected by the coronavirus epidemic, effective public health measures are immediately required that inhibit spreading of infection.

Moreover, well-directed economic policies are needed to:

• protect workers and solvent companies from undergoing considerable temporary income disruptions due to coronavirus, and
• help support the provision of health care.

OECD noted that stronger government spending and lower policy interest rates can help foster confidence and support with the recovery of demand once the travel restrictions are removed and the outbreak eases. A fall in the interest rates level can assist in reducing debt-servicing costs and restoring confidence.

Furthermore, monetary policies need to remain supportive in all the major economies for ensuring the persistence of low long-term interest rates. However, the effect of additional monetary policy actions is expected to be modest on inflation and demand, in the absence of any structural and fiscal policy support.

Taking this into consideration, the OECD has called for the active use of fiscal policy to strengthen near-term demand, comprising temporary expenditures to lessen the influence of the coronavirus outbreak on exposed businesses and social groups.

It is worth noting that the OECD expects the G20 economies to benefit from economic policy co-operation, which is likely to create positive spillover effects via improved confidence and trade, leading to a larger overall output gain in every country relative to the result if they acted alone.

Biosecurity Regulation Likely to Imposed in Australia Soon

In an effort to halt the spread of coronavirus, Australia can adopt stringent biosecurity measures to detain individuals who might be infected with the deadly coronavirus.

Australia’s Attorney General, Christian Porter has recently mentioned that Australia is likely to use biosecurity law to inhibit the movement of individuals suspected of coronavirus. Under the biosecurity act, government authorities can issue a human biosecurity control order to induce an individual to do or not do specific things.

For instance, the law can cancel a major sporting event where individuals are present in very close proximity to each other or where the risk of transmission of coronavirus is very high. Government authorities can also isolate specific areas to control the transmission of disease.

To curb the spread of disease, the law allows individuals to be detained or forced to undergo treatment if they deny complying with the health authorities’ directions. However, it is imperative to note that detention is considered as the last resort.

In a nutshell, though currently a smaller number of coronavirus cases have been confirmed in the nation, lives of millions of Australians are at risk in case the situation worsens. A dissemination of good hygiene practices, along with an appropriate mix of monetary, fiscal and structural policies, can deliver a highly effective result in response to the coronavirus outbreak.