Yesterday, Kristalina Georgieva, Managing Director of the International Monetary Fund, flagged that the IMF expects further downside to growth for 2020, noting "We unfortunately, over the last week, have seen a shift to a more adverse scenario for the global economy" and that "Under any scenario, global growth in 2020 will fall below last year's level". The IMF’s January projections had looked for global growth of 3.3% in 2020, up from 2.9% in 2019, and she noted that updated projections would be released in coming weeks at the latest World Economic Outlook. Georgieva noted that the shock was “unusual” as it impacted both supply and demand and that the extent of the epidemic and “the quality, timeliness, and effectiveness of policy actions" will be important drivers of growth. The IMF announced it is making available an emergency financing package of USD50bn for low income and emerging countries.
With global growth clearly at-risk, policy responses continued to be announced over the course of the day. The Bank of Canada followed the Fed’s rate cut earlier this week, cutting its benchmark rate by 50bps to 1.25% stating: “The COVID-19 virus is a material negative shock to the Canadian and global outlooks and monetary and fiscal authorities are responding”. Plus, the US announced the House of Representatives had passed USD8.3bn in emergency spending to combat COVID-19. Andrew Bailey, the incoming Governor of the Bank of England, when speaking to the Treasury select committee, warned that with limited room for rate cuts “We are collectively now going to have to provide some form of supply chain finance in the not too distant future.” In Europe, Italy, one of the European countries most affected by coronavirus at this juncture, is seeking flexibility on the EU budget rules and announced a €3.6bn package earlier in the week, which is probably much needed given the latest Q4 GDP print for 2019 showed the economy only grew 0.1% yoy in 2019. Encouragingly, Eurogroup released a statement yesterday stating that “We stand ready to take further coordinated policy action, including fiscal measures where appropriate, to support growth.”
On Wednesday, global equity markets enjoyed a strong bounce: The S&P 500 (+4.2%) was also helped by Joe Biden’s strong showing in the Super Tuesday primaries and an expectation that he is now likely to win the Democrat’s nomination. USTs also rallied but the 2-year-10-year curve steepened as the market looks for further rate cuts. However, with the scale and duration of the coronavirus still unknown, markets remain nervous; on Thursday morning the VIX index is still elevated, trading around 34 at the time of writing, and the S&P 500 future is indicated down.