What the G20 should do about the triple economic shock of COVID-19

A man withdraws money from an ATM outside the Saudi National Commercial Bank (NCB), after an outbreak of coronavirus, in Riyadh, Saudi Arabia, 18 March 2020 (Photo:Reuters/Ahmed Yosri).

Authors: Adam Triggs, ANU and Homi Kharas, Brookings

Every G20 Summit host is warned that all the careful planning can be overturned in an instant by a global crisis. Saudi Arabia’s planned agenda is now being pushed aside to make room for an emergency G20 leaders’ meeting in the coming days to deal with the COVID-19 (coronavirus) pandemic.

There is a perfect storm brewing in the global economy. Most recessions are caused by a demand shock (think 9/11), a supply shock (think oil price increases) or a financial shock (think GFC and Lehman Brothers). COVID-19 promises to deliver all of the above in a single wallop.

The demand shock is clear — whole populations are in quarantine. A large (5 to 10 per cent of GDP) decline in the next quarter is expected. Equally, the supply shock is widespread. As Geoff Gertz has noted, the real threat is that we do not know the potential production choke points as the mapping of supply chains is opaque. Finally, the recent actions of the US Fed to inject US$500 billion into repo markets suggest a liquidity crunch. Many small and medium enterprises will likely default or have to reschedule bank loans.

The G20 must act on all three fronts simultaneously to have impact.

First, leaders should announce a coordinated fiscal stimulus package to address the demand shock. The impact of fiscal stimulus can be up to twice as large when it is coordinated across the G20 because when any country operates on its own, there is demand leakage into imports that reduces the effect. Ideally, leaders give a one-shot direct cash transfer to households, particularly poorer households who are more likely to spend the money.

Having a collective G20 commitment also results …continue reading