The Covid-19 economic crisis: dangerously unique
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The Covid‑19 economic crisis: dangerously unique Claudio Borio1
© National Association for Business Economics 2020
Abstract The Covid-19 crisis is unique in several respects. This devastating recession does not have an economic origin, will dance largely to the tune of non-economic factors, and is truly global. The policy response has been equally unique, in terms of speed, size and scope, eliciting an unprecedented concerted effort combining monetary, fiscal and prudential policies. This has contained the fallout. At the time of writing, financial markets have rebounded to the point of looking exuberant, but it all feels more like a truce than a peace treaty. The crisis is transitioning from the liquidity to the solvency phase in a context of limited and shrinking room for policy manoeuvre. All this raises difficult near- and longer-term challenges. Rebuilding policy buffers in all policy areas is likely to be the policy challenge of the decade ahead. Keywords COVID-19 · Macroeconomic policies · Illiquidity · Insolvency · Debt · Inflation Thank you for the invitation to speak at this event; I am glad to be back. In the next 20 minutes or so, I would like to reflect on the current economic crisis, the response so far and the challenges ahead. In doing so, I will draw heavily on the BIS Annual Economic Report (2020); I strongly encourage you to read it! My takeaways? I would say three. First, a unique crisis has called for a unique response. Second, things are looking up, but it feels more like a truce than a peace treaty. In fact, the crisis is transitioning from the liquidity to the solvency phase. Finally, depending on how things evolve, there could be serious challenges ahead. Some of these challenges are old, and some are new, or at least old ones in a different guise. If there is a long-term challenge that I would highlight, it is the need to rebuild policy buffers. Monetary, fiscal and prudential policy buffers should be rebuilt as soon as conditions allow. Let me take each point in turn: the policy response, the near-term challenges, and the longer-term ones.
Presentation made at the NABE Perspectives on the Pandemic Webinar Series, July 2, 2020. * Claudio Borio 1
Bank for International Settlements, Basel, Switzerland
1 A unique crisis, a unique policy response Much has rightly been said about the uniqueness of this crisis. The crisis has resulted from a policy to tackle a health emergency through containment measures. Hence characterisations such as “putting the global economy into an induced coma” or “into hibernation”. And it has induced contractions in output and employment that have been even steeper than those during the Great Depression. Hence characterisations such as “a global sudden stop” (Fig. 1). All this means that, in contrast to the Great Financial Crisis (GFC) of 2007–2009, the present crisis has three key features. It is truly exogenous, not the result of the unravelling of previous financial imbalances—the typical recession trigger since the mid-1980s. It is truly uncertai
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