Global Economic Effects of COVID-19
Released: 2020-05-15T00:00:00

Overview

The World Health Organization (WHO) first declared COVID-19 a world health emergency in January 2020. Since the virus was first diagnosed in Wuhan, China, it has been detected in over 190 countries and all U.S. states. In early March, the focal point of infections shifted from China to Europe, especially Italy, but by April 2020, the focus shifted to the United States, where the number of infections was accelerating. The infection has sickened more than 4.5 million people, about one-third in the United States, with thousands of fatalities. More than 80 countries have closed their borders to arrivals from countries with infections, ordered businesses to close, instructed their populations to self-quarantine, and closed schools to an estimated 1.5 billion children.

Over the eight-week period from mid-March to mid-May 2020, more than 36.5 million Americans filed for unemployment insurance. On May 8, 2020, the Bureau of Labor Statistics (BLS) reported that 20 million Americans lost their jobs in April 2020, pushing the total number of unemployed Americans to 23 million, out of a total civilian labor force of 156 million. The increase pushed the national unemployment rate to 14.7%, the highest since the Great Depression of the 1930s. Preliminary data also indicate that U.S. GDP fell by 4.8% in the first quarter of 2020, the largest quarterly decline in GDP since the fourth quarter of 2008 during the global financial crisis.

In Europe, over 30 million people in Germany, France, the UK, Spain, and Italy have applied for state support of their wages, while first quarter 2020 data indicate that the Eurozone economy contracted by 3.8% at an annual rate, the largest quarterly decline since the series started in 1995. The European Commission released its economic forecast on May 6, 2020, which projects that EU economic growth in 2020 will contract by 7.4% and only partially recover in 2021. Foreign investors have pulled an estimated $26 billion out of developing Asian economies and more than $16 billion out of India, increasing concerns of a major economic recession in Asia. Some estimates indicate that 29 million people in Latin America could fall into poverty, reversing a decade of efforts to narrow income inequality.

The pandemic crisis is challenging governments to implement monetary and fiscal policies that support credit markets and sustain economic activity, while they are implementing policies to develop vaccines and safeguard their citizens. In doing so, however, differences in policy approaches are straining relations between countries that promote nationalism and those that argue for a coordinated international response. Differences in policies are also straining relations between developed and developing economies and between northern and southern members of the Eurozone, challenging alliances, and raising questions about the future of global leadership.

After a delayed response, central banks and monetary authorities are engaging in an ongoing series of interventions in financial markets and national governments are announcing fiscal policy initiatives to stimulate their economies. International organizations are also taking steps to provide loans and other financial assistance to countries in need. These and other actions have been labeled "unprecedented," a term that has been used frequently to describe the pandemic and the policy responses.

As one measure of the global fiscal and monetary responses, the International Monetary Fund (IMF) estimated that government spending and revenue measures to sustain economic activity adopted through mid-April 2020 amounted to $3.3 trillion and that loans, equity injections and guarantees totaled an additional $4.5 trillion. The IMF also estimates that the increase in borrowing by governments globally will rise from 3.7% of global gross domestic product (GDP) in 2019 to 9.9% in 2020, as indicated in Figure 1 . Among developed economies, the fiscal balance to GDP ratio is projected to rise from 3.0% in 2019 to 10.7% in 2020; the ratio for the United States is projected to rise from 5.8% to 15.7%. According to the IMF, France, Germany, Italy, Japan, and the United Kingdom have each announced public sector support measures totaling more than 10% of their annual GDP. For developing economies, the fiscal balance to GDP ratio is projected to rise from 4.8% to 9.1%, significantly increasing their debt burden and raising prospects of defaults or debt rescheduling. According to some estimates, the most fiscally vulnerable countries are: Argentina, Venezuela, Lebanon, Jordan, Iran, Zambia, Zimbabwe, and South Africa.

Among central banks, the Federal Reserve has taken extraordinary steps not experienced since the 2008-2009 global financial crisis to address the growing economic effects of COVID-19. The U.S. Congress also has approved historic fiscal spending packages. In other countries, central banks have lowered interest rates and reserve requirements, announced new financing facilities, relaxed capital buffers and, in some cases, countercyclical capital buffers, adopted after the 2008-2009 financial crisis, potentially freeing up an estimated $5 trillion in funds. Capital buffers were raised after the financial crisis to assist banks in absorbing losses and staying solvent during financial crises. In some cases, governments have directed banks to freeze dividend payments and halt pay bonuses.

On March 11, the WHO announced that the outbreak was officially a pandemic, the highest level of health emergency. A growing list of economic indicators makes it clear that the outbreak is negatively affecting global economic growth on a scale that has not been experienced since at least the global financial crisis of 2008-2009. Global trade and GDP are forecast to decline sharply at least through the first half of 2020. The global pandemic is affecting a broad swath of international economic and trade activities, from services generally to tourism and hospitality, medical supplies and other global value chains, consumer electronics, and financial markets to energy, transportation, food, and a range of social activities, to name a few. The health and economic crises could have a particularly negative impact on the economies of developing countries that are constrained by limited financial resources and where health systems could quickly become overloaded.

Without a clear understanding of when the global health and economic effects may peak and a greater understanding of the impact on economies, forecasts must necessarily be considered preliminary. Similarly, estimates of when any recovery might begin and the speed of the recovery are speculative. Efforts to reduce social interaction to contain the spread of the virus are disrupting the daily lives of most Americans and adding to the economic costs. Increasing rates of unemployment are raising the prospects of wide-spread social unrest and demonstrations in developed economies where lost incomes and health insurance are threatening living standards and in developing economies where populations reportedly are growing concerned over access to basic necessities and the prospects of rising levels of poverty. U.N. Secretary General Antonio Guterres argued in a video conference before the U.N. Security Council on April 10, 2020, that the

pandemic also poses a significant threat to the maintenance of international peace and securityâpotentially leading to an increase in social unrest and violence that would greatly undermine our ability to fight the disease.

Economic Forecasts

Global Growth

The economic situation remains highly fluid. Uncertainty about the length and depth of the health crisis-related economic effects are fueling perceptions of risk and volatility in financial markets and corporate decision-making. In addition, uncertainties concerning the global pandemic and the effectiveness of public policies intended to curtail its spread are adding to market volatility. In a growing number of cases, corporations are postponing investment decisions, laying off workers who previously had been furloughed, and in some cases filing for bankruptcy. Compounding the economic situation is a historic drop in the price of crude oil that reflects the global decline in economic activity and prospects for disinflation, while also contributing to the decline of the global economy through various channels. On April 29, 2020, Federal Reserve Chairman Jay Powell stated that the Federal Reserve would use its "full range of tools" to support economic activity as the U.S. economic growth rate dropped 4.8% at an annual rate in the first quarter of 2020. In assessing the state of the U.S. economy, the Federal Open Market Committee released a statement indicating that, "The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."

The Organization for Economic Cooperation and Development (OECD) on March 2, 2020, lowered its forecast of global economic growth by 0.5% for 2020 from 2.9% to 2.4%, based on the assumption that the economic effects of the virus would peak in the first quarter of 2020 (see Table 1 ). However, the OECD estimated that if the economic effects of the virus did not peak in the first quarter, which is now apparent that it did not, global economic growth would increase by 1.5% in 2020. That forecast now seems to have been highly optimistic.

On March 23, 2020, OECD Secretary General Angel Gurria stated that

The sheer magnitude of the current shock introduces an unprecedented complexity to economic forecasting. The OECD Interim Economic Outlook, released on March 2, 2020, made a first attempt to take stock of the likely impact of COVID-19 on global growth, but it now looks like we have already moved well beyond even the more severe scenario envisaged thenâ¦. [T]he pandemic has also set in motion a major economic crisis that will burden our societies for years to come.

On March 26, 2020, the OECD revised its global economic forecast based on the mounting effects of the pandemic and measures governments have adopted to contain the spread of the virus. According to the updated estimate, the current containment measures could reduce global GDP by 2.0% per month, or an annualized rate of 24%, approaching the level of economic contraction not experienced since the Great Depression of the 1930s. The OECD estimates in Table 1 will be revised when the OECD releases updated country-specific data.

Labeling the projected decline in global economic activity as the "Great Lockdown," the IMF released an updated forecast on April 14, 2020. The IMF concluded that the global economy would experience its "worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago." In addition, the IMF estimated that the global economy could decline by 3.0% in 2020, before growing by 5.8% in 2021; global trade is projected to fall in 2020 by 11.0% and oil prices are projected to fall by 42%, also shown in Table 1 . This forecast assumes that the pandemic fades in the second half of 2020 and that the containment measures can be reversed quickly. The IMF also stated that many countries are facing a multi-layered crisis that includes a health crisis, a domestic economic crisis, falling external demand, capital outflows, and a collapse in commodity prices. In combination, these various effects are interacting in ways that make forecasting difficult.

Advanced economies as a group are forecast to experience an economic contraction in 2020 of 7.8% of GDP, with the U.S. economy projected by the IMF to decline by 5.9%, about twice the rate of decline experienced in 2009 during the financial crisis, as indicated in Figure 2 . The rate of economic growth in the Euro area is projected to decline by 7.5% of GDP. Most developing and emerging economies are projected to experience a decline in the rate of economic growth of 2.0%, reflecting tightening global financial conditions and falling global trade and commodity prices. In contrast, China, India, and Indonesia are projected to experience small, but positive rates of economic growth in 2020. The IMF also argues that recovery of the global economy could be weaker than projected as a result of: lingering uncertainty about possible contagion, lack of confidence, and permanent closure of businesses and shifts in the behavior of firms and households.

As a result of the various challenges, the IMF qualified its forecast by arguing that

A partial recovery is projected for 2021, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound. Much worse growth outcomes are possible and maybe even likely. This would follow if the pandemic and containment measures last longer, emerging and developing economies are even more severely hit, tight financial conditions persist, or if widespread scarring effects emerge due to firm closures and extended unemployment.

Before the COVID-19 outbreak, the global economy was struggling to regain a broad-based recovery as a result of the lingering impact of growing trade protectionism, trade disputes among major trading partners, falling commodity and energy prices, and economic uncertainties in Europe over the impact of the UK withdrawal from the European Union. Individually, each of these issues presented a solvable challenge for the global economy. Collectively, however, the issues weakened the global economy and reduced the available policy flexibility of many national leaders, especially among the leading developed economies. In this environment, COVID-19 could have an outsized impact. While the level of economic effects will eventually become clearer, the response to the pandemic could have a significant and enduring impact on the way businesses organize their work forces, global supply chains, and how governments respond to a global health crisis.

The OECD estimates that increased direct and indirect economic costs through global supply chains, reduced demand for goods and services, and declines in tourism and business travel mean that, "the adverse consequences of these developments for other countries (non-OECD) are significant." Global trade, measured by trade volumes, slowed in the last quarter of 2019 and had been expected to decline further in 2020, as a result of weaker global economic activity associated with the pandemic, which is negatively affecting economic activity in various sectors, including airlines, hospitality, ports, and the shipping industry.

According to the OECD's updated forecast

The greatest impact of the containment restrictions will be on retail and wholesale trade, and in professional and real estate services, although there are notable differences between countries. Business closures could reduce economic output in advanced and major emerging economies by 15% or more; other emerging economies could experience a decline in output of 25%. Countries dependent on tourism could be affected more severely, while countries with large agricultural and mining sectors could experience less severe effects. Economic effects likely will vary across countries reflecting differences in the timing and degree of containment measures.

In addition, the OECD argues that China's emergence as a global economic actor marks a significant departure from previous global health episodes. China's growth, in combination with globalization and the interconnected nature of economies through capital flows, supply chains, and foreign investment, magnify the cost of containing the spread of the virus through quarantines and restrictions on labor mobility and travel. China's global economic role and globalization mean that trade is playing a role in spreading the economic effects of COVID-19. More broadly, the economic effects of the pandemic are being spread through three trade channels: (1) directly through supply chains as reduced economic activity is spread from intermediate goods producers to finished goods producers; (2) as a result of a drop overall in economic activity, which reduces demand for goods in general, including imports; and (3) through reduced trade with commodity exporters that supply producers, which, in turn, reduces their imports and negatively affects trade and economic activity of exporters.

Global Trade

According to an April 8, 2020, forecast by the World Trade Organization (WTO), global trade volumes are projected to decline between 13% and 32% in 2020 as a result of the economic impact of COVID-19, as indicated in Table 2 . The WTO argues that the wide range in the forecast represents the high degree of uncertainty concerning the length and economic impact of the pandemic and that the actual economic outcome could be outside this range, either higher or lower. The WTO's more optimistic scenario assumes that trade volumes recover quickly in the second half of 2020 to their pre-pandemic trend, or that the global economy experiences a V-shaped recovery. The more pessimistic scenario assumes a partial recovery that lasts into 2021, or that global economic activity experiences more of a U-shaped recovery. The WTO concludes, however, that the impact on global trade volumes could exceed the drop in global trade during the height of the 2008-2009 financial crisis.

The estimates indicate that all geographic regions will experience a double-digit drop in trade volumes, except for "other regions," which consists of Africa, the Middle East, and the Commonwealth of Independent States. North America and Asia could experience the steepest declines in export volumes. The forecast also projects that sectors with extensive value chains, such as automobile products and electronics, could experience the steepest declines. Although services are not included in the WTO forecast, this segment of the economy could experience the largest disruption as a consequence of restrictions on travel and transport and the closure of retail and hospitality establishments. Such services as information technology, however, are growing to satisfy the demand of employees who are working from home.

Economic Policy Challenges

The challenge for policymakers has been one of implementing targeted policies that address what had been expected to be short-term problems without creating distortions in economies that can outlast the impact of the virus itself. Policymakers, however, are being overwhelmed by the quickly changing nature of the global health crisis that appears to be turning into a global trade and economic crisis whose effects on the global economy are escalating. As the economic effects of the pandemic grow, policymakers are giving more weight to policies that address the immediate economic effects at the expense of longer-term considerations such as debt accumulation. Initially, many policymakers had felt constrained in their ability to respond to the crisis as a result of limited flexibility for monetary and fiscal support within conventional standards, given the broad-based synchronized slowdown in global economic growth, especially in manufacturing and trade that had developed prior to the viral outbreak. The pandemic is also affecting global politics as world leaders are cancelling international meetings, competing for medical supplies, and some nations reportedly are stoking conspiracy theories that shift blame to other countries.

Initially, the economic effects of the virus were expected to be short-term supply issues as factory output fell because workers were quarantined to reduce the spread of the virus through social interaction. The drop in economic activity, initially in China, has had international repercussions as firms experienced delays in supplies of intermediate and finished goods through supply chains. Concerns are growing, however, that virus-related supply shocks are creating more prolonged and wide-ranging demand shocks as reduced activity by consumers and businesses leads to a lower rate of economic growth. As demand shocks unfold, businesses experience reduced activity and profits and potentially escalating and binding credit and liquidity constraints. While manufacturing firms are experiencing supply chain shocks, reduced consumer activity through social distancing is affecting the services sector of the economy, which accounts for two-thirds of annual U.S. economic output. In this environment, manufacturing and service firms have tended to hoard cash, which affects market liquidity. In response, central banks have lowered interest rates where possible and expanded lending facilities to provide liquidity to financial markets and to firms potentially facing insolvency.

The longer the economic effects persist, the greater the economic impacts are likely to be as the effects are spread through trade and financial linkages to an ever-broadening group of countries, firms and households. These growing economic effects potentially increase liquidity constraints and credit market tightening in global financial markets as firms hoard cash, with negative fallout effects on economic growth. At the same time, financial markets are factoring in an increase in government bond issuance in the United States, Europe, and elsewhere as government debt levels are set to rise to meet spending obligations during an expected economic recession and increased fiscal spending to fight the effects of COVID-19. Unlike the 2008-2009 financial crisis, reduced demand by consumers, labor market issues, and a reduced level of activity among businesses, rather than risky trading by global banks, has led to corporate credit issues and potential insolvency. These market dynamics have led some observers to question if these events mark the beginning of a full-scale global financial crisis.

Liquidity and credit market issues present policymakers with a different set of challenges than addressing supply-side constraints. As a result, the focus of government policy has expanded from a health crisis to macroeconomic and financial market issues that are being addressed through a combination of monetary, fiscal, and other policies, including border closures, quarantines, and restrictions on social interactions. Essentially, while businesses are attempting to address worker and output issues at the firm level, national leaders are attempting to implement fiscal policies to prevent economic growth from falling sharply by assisting workers and businesses that are facing financial strains, and central bankers are adjusting monetary policies to address mounting credit market issues.

In the initial stages of the health crisis, households did not experience the same kind of wealth losses they saw during the 2008-2009 financial crisis when the value of their primary residence dropped sharply. However, with unemployment numbers rising rapidly, job losses could result in defaults on mortgages and delinquencies on rent payments, unless financial institutions provide loan forbearance or there is a mechanism to provide financial assistance. In turn, mortgage defaults could negatively affect the market for mortgage-backed securities, the availability of funds for mortgages, and negatively affect the overall rate of economic growth. Losses in the value of most equity markets in the U.S., Asia, and Europe could also affect household wealth, especially that of retirees living on a fixed income and others who own equities. Investors that trade in mortgage-backed securities reportedly have been reducing their holdings while the Federal Reserve has been attempting to support the market. In the current environment, even traditional policy tools, such as monetary accommodation, apparently have not been processed by markets in a traditional manner, with equity market indices displaying heightened, rather than lower, levels of uncertainty following the Federal Reserve's cut in interest rates. Such volatility is adding to uncertainties about what governments can do to address weaknesses in the global economy.

Economic Developments

Between late February and early May, 2020, financial markets from the United States to Asia and Europe have been whipsawed as investors have grown concerned that COVID-19 would create a global economic and financial crisis with few metrics to indicate how prolonged and extensive the economic effects may be. Investors have searched for safe-haven investments, such as the benchmark U.S. Treasury 10-year security, which experienced a historic drop in yield to below 1% on March 3, 2020. In response to concerns that the global economy was in a freefall, the Federal Reserve lowered key interest rates on March 3, 2020, to shore up economic activity, while the Bank of Japan engaged in asset purchases to provide short-term liquidity to Japanese banks; Japan's government indicated it would also assist workers with wage subsidies. The Bank of Canada also lowered its key interest rate. The International Monetary Fund (IMF) announced that it was making about $50 billion available through emergency financing facilities for low-income and emerging market countries and through funds available in its Catastrophe Containment and Relief Trust (CCRT).

Reflecting investors' uncertainties, the Dow Jones Industrial Average (DJIA) lost about one-third of its value between February 14, 2020, and March 23, 2020, as indicated in Figure 3 . Expectations that the U.S. Congress would adopt a $2.0 trillion spending package moved the DJIA up by more than 11% on March 24, 2020. From March 23 to April 15, the DJIA moved higher by18%, paring its initial losses by half. Since then, the DJIA has moved erratically as investors have weighed news about the human cost and economic impact of the pandemic and the prospects of various medical treatments. For some policymakers, the drop in equity prices has raised concerns that foreign investors might attempt to exploit the situation by increasing their purchases of firms in sectors considered important to national security. For instance, Ursula von der Leyen, president of the European Commission, urged EU members to better screen foreign investments, especially in areas such as health, medical research, and critical infrastructure.

Similar to the 2008-2009 global financial crisis, central banks have implemented a series of monetary operations to provide liquidity to their economies. These actions, however, initially were not viewed entirely positively by all financial market participants who questioned the use of policy tools by central banks that are similar to those employed during the 2008-2009 financial crisis, despite the fact that the current and previous crisis are fundamentally different in origin. During the previous financial crisis, central banks intervened to restart credit and spending by banks that had engaged in risky assets. In the current environment, central banks are attempting to address financial market volatility and prevent large-scale corporate insolvencies that reflect the underlying economic uncertainty caused by the pandemic.

Similar to conditions during the 2008-2009 financial crisis, the dollar has emerged as the preferred currency by investors, reinforcing its role as the dominant global reserve currency. As indicated in Figure 4 , the dollar appreciated more than 3.0% during the period between March 3 and March 13, 2020, reflecting increased international demand for the dollar and dollar-denominated assets. Since the highs reached on March 23, the dollar has given up some of its value against other currencies, but has remained about 10% higher than it was at the beginning of the year. According to a recent survey by the Bank for International Settlements (BIS), the dollar accounts for 88% of global foreign exchange market turnover and is key in funding an array of financial transactions, including serving as an invoicing currency to facilitate international trade. It also accounts for two-thirds of central bank foreign exchange holdings, half of non-U.S. banks foreign currency deposits, and two-thirds of non-U.S. corporate borrowings from banks and the corporate bond market. As a result, disruptions in the smooth functioning of the global dollar market can have wide-ranging repercussions on international trade and financial transactions.

The international role of the dollar also increases pressure on the Federal Reserve essentially to assume the lead role as the global lender of last resort. Reminiscent of the financial crisis, the global economy has experienced a period of dollar shortage, requiring the Federal Reserve to take numerous steps to ensure the supply of dollars to the U.S. and global economies, including activating existing currency swap arrangements, establishing such arrangements with additional central banks, and creating new financial facilities to provide liquidity to central banks and monetary authorities. Typically, banks lend long-term and borrow short-term and can only borrow from their home central bank. In turn, central banks can only provide liquidity in their own currency. Consequently, a bank can become illiquid in a panic, meaning it cannot borrow in private markets to meet short-term cash flow needs. Swap lines are designed to allow foreign central banks the funds necessary to provide needed liquidity to their country's banks in dollars.

March 2020

The yield on U.S. Treasury securities dropped to historic levels on March 6, 2020, and March 9, 2020, as investors continued to move out of stocks and into Treasury securities and other sovereign bonds, including UK and German bonds, due in part to concerns over the impact the pandemic would have on economic growth and expectations the Federal Reserve and other central banks would lower short-term interest rates. On March 5, the U.S. Congress passed a $8 billion spending bill to provide assistance for health care, sick leave, small business loans, and international assistance. At the same time, commodity prices dropped sharply as a result of reduced economic activity and disagreements among oil producers over production cuts in crude oil and lower global demand for commodities, including crude oil.

The drop in some commodity prices raised concerns about corporate profits and led some investors to sell equities and buy sovereign bonds. In overnight trading in various sessions between March 8, and March 24, U.S. stock market indexes moved sharply (both higher and lower), triggering automatic circuit breakers designed to halt trading if the indexes rise or fall by more than 5% when markets are closed and 7% when markets are open. By early April, the global mining industry had reduced production by an estimated 20% in response to falling demand and labor quarantines and as a strategy for raising prices.

Ahead of a March 12, 2020, scheduled meeting of the European Central Bank (ECB), the German central bank (Deutsche Bundesbank) announced a package of measures to provide liquidity support to German businesses and financial support for public infrastructure projects. At the same time, the Fed announced that it was expanding its repo market transactions (in the repurchase market, investors borrow cash for short periods in exchange for high-quality collateral like Treasury securities) after stock market indexes fell sharply, government bond yields fell to record lows (reflecting increased demand), and demand for corporate bonds fell. Together these developments raised concerns for some analysts that instability in stock markets could threaten global financial conditions.

On March 11, as the WHO designated COVID-19 a pandemic, governments and central banks adopted additional monetary and fiscal policies to address the growing economic impact. European Central Bank (ECB) President-designate Christine Lagarde in a conference call to EU leaders warned that without coordinated action, Europe could face a recession similar to the 2008-2009 financial crisis. The Bank of England lowered its key interest rate, reduced capital buffers for UK banks, and provided a funding program for small and medium businesses. The UK Chancellor of the Exchequer also proposed a budget that would appropriate Â£30 billion (about $35 billion) for fiscal stimulus spending, including funds for sick pay for workers, guarantees for loans to small businesses, and cuts in business taxes. The European Commission announced a â¬25 billion (about $28 billion) investment fund to assist EU countries and the Federal Reserve announced that it would expand its repo market purchases to provide larger and longer-term funding to provide added liquidity to financial markets.

President Trump imposed restrictions on travel from Europe to the United States on March 12, 2020, surprising European leaders and adding to financial market volatility. At its March 12 meeting, the ECB announced â¬27 billion (about $30 billion) in stimulus funding, combining measures to expand low-cost loans to Eurozone banks and small and medium-sized businesses and implement an asset purchase program to provide liquidity to firms. Germany indicated that it would provide tax breaks for businesses and "unlimited" loans to affected businesses. The ECB's Largarde roiled markets by stating that it was not the ECB's job to "close the spread" between Italian and German government bond yields (a key risk indicator for Italy), a comment reportedly interpreted as an indicator the ECB was preparing to abandon its support for Italy, a notion that was denied by the ECB. The Fed also announced that it would further increase its lending in the repo market and its purchases of Treasury securities to provide liquidity. As a result of tight market conditions for corporate bonds, firms turned to their revolving lines of credit with banks to build up their cash reserves. The price of bank shares fell, reflecting sales by investors who reportedly had grown concerned that banks would experience a rise in loan defaults. Despite the various actions, the DJIA fell by nearly 10% on March 12, recording the worst one-day drop since 1987. Between February 14 and March 12, the DJIA fell by more than 8,000 points, or 28% of its value. Credit rating agencies began reassessing corporate credit risk, including the risk of firms that had been considered stable.

On March 13, President Trump declared a national emergency, potentially releasing $50 billion in disaster relief funds to state and local governments. The announcement moved financial markets sharply higher, with the DJIA rising 10%. Financial markets also reportedly moved higher on expectations the Fed would lower interest rates. House Democrats and President Trump agreed to a $2 trillion spending package to provide paid sick leave, unemployment insurance, food stamps, support for small businesses, and other measures. The EU indicated that it would relax budget rules that restrict deficit spending by EU members. In other actions, the People's Bank of China cut its reserve requirements for Chinese banks, potentially easing borrowing costs for firms and adding $79 billion in funds to stimulate the Chinese economy; Norway's central bank reduced its key interest rate; the Bank of Japan acquired billions of dollars of government securities (thereby increasing liquidity); and the Reserve Bank of Australia injected nearly $6 billion into its financial system. The Bank of Canada also lowered its overnight bank lending rate.

The Federal Reserve lowered its key interest rate to near zero on March 15, 2020, arguing that the pandemic had "harmed communities and disrupted economic activity in many countries, including the United States" and that it was prepared to use its "full range of tools." It also announced an additional $700 billion in asset purchases, including Treasury securities and mortgage-backed securities, expanded repurchase operations, activated dollar swap lines with Canada, Japan, Europe, the UK, and Switzerland, opened its discount window to commercial banks to ease household and business lending, and urged banks to use their capital and liquidity buffers to support lending.

Despite the Fed's actions the previous day to lower interest rates, interest rates in the U.S. commercial paper market, where corporations raise cash by selling short-term debt, rose on March 16, 2020, to their highest levels since the 2008-2009 financial crisis, prompting investors to call on the Federal Reserve to intervene. The DJIA dropped nearly 3,000 points, or about 13%. Most automobile manufacturers announced major declines in sales and production; similarly, most airlines reported they faced major cutbacks in flights and employee layoffs due to diminished economic activity. Economic data from China indicated the economy would slow markedly in the first quarter of 2020, potentially greater than that experienced during the global financial crisis. The Bank of Japan announced that it would double its purchases of exchange traded funds and the G-7 countries issued a joint statement promising "a strongly coordinated international approach," although no specific actions were mentioned. The IMF issued a statement indicating its support for additional fiscal and monetary actions by governments and that the IMF "stands ready to mobilize its $1 trillion lending capacity to help its membership." The World Bank also promised an additional $14 billion to assist governments and companies address the pandemic.

Following the drop in equity market indexes the previous day, the Federal Reserve unveiled a number of facilities on March 17, 2020, in some cases reviving actions it had not taken since the financial crisis. It announced that it would allow the 24 primary dealers in Treasury securities to borrow cash collateralized against some stocks, municipal debt, and higher-rated corporate bonds; revive a facility to buy commercial paper; and provide additional funding for the overnight repo market. The UK government proposed government-backed loans to support business; a three-month moratorium on mortgage payments for homeowners; a new lending facility with the Bank of England to provide low-cost commercial paper to support lending; and loans for businesses.

In an emergency session on March 18, the ECB announced a temporary, non-standard asset purchase program, the Pandemic Emergency Purchase Program (PEPP), to acquire an additional â¬750 billion (over $820 billion) in public and private sector bonds to counter the risks posed by the pandemic crisis (as of May 5, the ECB had purchased about $180 billion in securities). The ECB also broadened the types of assets it would accept as collateral to include non-financial commercial paper, eased collateral standards for banks, and waived restrictions on acquiring Greek government debt. The program was expected to end no later than yearend 2020.

The Federal Reserve broadened its central bank dollar swap lines to include Brazil, Mexico, Australia, Denmark, Norway, and Sweden. Automobile manufacturers announced they were suspending production at an estimated 100 plants across North America, following similar plant closures in Europe. Major U.S. banks announced a moratorium on share repurchases, or stock buy-backs, denying equity markets a major source of support and potentially amplifying market volatility. During the week, more than 22 central banks in emerging economies, including Brazil, Turkey, and Vietnam, lowered their key interest rates.

By March 19, 2020, investors were selling sovereign and other bonds as firms and other financial institutions attempted to increase their cash holdings, although actions central banks took during the week appeared to calm financial markets. Compared to previous financial market dislocations in which stock market values declined while bond prices rose, stock and bond values fell at the same time in March 2020 as investors reportedly adopted a "sell everything" mentality to build up cash reserves. Senate Republicans introduced the Coronavirus Aid, Relief, and Economic Security Act to provide $2 trillion in spending to support the U.S. economy.

By the close of trading on March 20, the DJIA index had fallen by 17% from March 13. At the same time, the dollar continued to gain in value against other major currencies and the price of Brent crude oil dropped close to $20 per barrel on March 20, as indicated in Figure 5 . The Federal Reserve announced that it would expand a facility to support the municipal bond market. Britain's Finance Minister announced an "unprecedented" fiscal package to pay up to 80% of an employee's wages and deferring value added taxes by businesses. The ECB's Largarde justified actions by the Bank during the week to provide liquidity by arguing that the "coronavirus pandemic is a public health emergency unprecedented in recent history." Market indexes fell again on March 23 as the Senate debated the parameters of a new spending bill to support the economy. Oil prices also continued to fall as oil producers appeared to be in a standoff over cuts to production.

Financial markets continued to fall on March 23, 2020, as market indexes reached their lowest point since the start of the pandemic crisis. The Federal Reserve announced a number of new facilities to provide an unlimited expansion in bond buying programs. The measures included additional purchases of Treasury and mortgage-backed securities; additional funding for employers, consumers, and businesses; establishing the Primary Market Corporate Credit Facility (PMCCF) to support issuing new bonds and loans and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds; establishing the Term Asset-Backed Securities Loan Facility (TALF), to support credit to consumers and businesses; expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to provide credit to municipalities; and expanding the Commercial Paper Funding Facility (CPFF) to facilitate the flow of credit to municipalities. The OECD released a statement encouraging its members to support "immediate, large-scale and coordinated actions." These actions included (1) more international cooperation to address the health crisis; (2) coordinated government actions to increase spending to support health care, individuals, and firms; (3) coordinated central bank action to supervise and regulate financial markets; and (4) policies directed at restoring confidence.

Reacting to the Fed's announcement, the DJIA closed up 11% on March 24, marking one of the sharpest reversals in the market index since February 2020. European markets, however, did not follow U.S. market indexes as various indicators signaled a decline in business activity in the Eurozone that was greater than that during the financial crisis and indicated the growing potential for a severe economic recession. U.S. financial markets were buoyed on March 25 and 26 over passage in Congress of a $2.2 trillion economic stimulus package.

On March 27, leaders of the G-20 countries announced through a video conference they had agreed to inject $5 trillion into the global economy and to do "whatever it takes to overcome the pandemic." Also at the meeting, the OECD offered an updated forecast of the viral infection, which projected that the global economy could shrink by as much as 2% a month. Nine Eurozone countries, including France, Italy, and Spain called on the ECB to consider issuing "coronabonds," a common European debt instrument to assist Eurozone countries in fighting COVID-19. The ECB announced that it was removing self-imposed limits that it had followed in previous asset purchase programs that restricted its purchases of any one country's bonds. Japan announced that it would adopt an emergency spending package worth $238 billion, or equivalent to 10% of the country's annual GDP. Despite the various actions, global financial markets turned down March 27 (the DJIA dropped by 900 points) reportedly over volatility in oil markets and concerns that the economic effects of the COVID-19 pandemic were worsening.

By March 30, central banks in developing countries from Poland, Columbia, South Africa, the Philippines, Brazil, and the Czech Republic reportedly had begun adopting monetary policies similar to that of the Federal Reserve to stimulate their economies. In commodity markets, Brent crude oil prices continued to fall, reaching a low of $22.76. Strong global demand for dollars continued to put upward pressure on the international value of the dollar. In response, the Federal Reserve introduced a new temporary facility that would work with its swap lines to allow central banks and international monetary authorities to enter into repurchase agreements with the Fed. From mid-March to mid-April, U.S. workers' claims for unemployment benefits reached over 17 million as firms faced a collapse in demand and requirements for employees to self-quarantine caused them to begin furloughing or laying off employees. Financial markets began to recover somewhat in early April in response to the accumulated monetary and fiscal policy initiatives, but remained volatile as a result of uncertainty over efforts to reach an output agreement among oil producers and the continued impact of the viral health effects.

April 2020

The Federal Reserve announced on April 8 that it was establishing a facility to fund small businesses through the Paycheck Protection Program. Japan also announced that it was preparing to declare areas around Tokyo to be in a state of emergency and that it would adopt a $989 billion funding package.

On April 9, OPEC and Russia reportedly agreed to cut oil production by 10 million barrels per day. On April 15, G-20 finance ministers and central bank governors announced their support for the proposed agreement by Saudi Arabia and Russia to reduce oil production. They also announced an agreement to freeze government loan payments until the end of the year to help low-income developing countries address the pandemic and asked international financial institutions to do likewise. G-7 finance ministers and central bank governors agreed to support the G-20 proposal to suspend debt payments by developing countries. Eurozone finance ministers announced a â¬500 billion (about $550 billion) emergency spending package to support governments, businesses, and workers. Reportedly, the measure will provide funds to the European Stability Mechanism, the European Investment Bank, and for unemployment insurance.

In other policy areas, the IMF announced that it was doubling its emergency lending capability to $100 billion, in response to requests from more than 90 countries for assistance. The Bank of England announced that it would take the unprecedented move of temporarily directly financing UK government emergency spending needs through monetary measures rather than through the typical method of issuing securities to fight the effects of COVID-19. Secretary-General of the United Nations Guterres declared on April 9, 2020, before the United Nations Security Council that the pandemic poses a significant threat to the maintenance of international peace and security and outlined eight specific risks, including the erosion of trust in public institutions, increased risks from terrorism and bioterrorism, and worsening existing human rights abuses.

Federal Reserve Chairman Jerome Powell, stating that the U.S. economy was deteriorating "with alarming speed," announced on April 10 that the Fed would provide an additional $2.3 trillion in loans, including a new financial facility to assist firms by acquiring shares in exchange traded funds that own the debt of lower-rated, riskier firms that are among the most exposed to deteriorating economic conditions associated with COVID-19 and low oil prices. On April 16, the U.S. Labor Department reported that 5.2 million Americans filed for unemployment insurance during the previous week, raising the total claims since mid-March to over 22 million. According to Chinese official statistics, the Chinese economy shrank by 6.8% on an annual basis during the first quarter of 2020, reportedly the first such contraction in 40 years.

Financial market indicators rose on April 17, reportedly on an upbeat sentiment that actions taken by the Federal Reserve and other central banks would stabilize conditions in the corporate credit market. The price of futures contracts for oil delivery in May 2020 for the U.S. West Texas Intermediate (WTI) fell to $18 per barrel, the lowest it had been since 2002, reportedly reflecting rising inventories and low global demand. Leaders of emerging economies in Latin America and Africa argued that the G-20 call for suspension of interest payments fell short of what is needed. National leaders from Columbia, Brazil, Mexico, and Chile encouraged the World Bank, the InterAmerican Development Bank and the IMF to double their net lending to Latin America, arguing that, "The Covid-19 pandemic is a shock of unprecedented magnitude, uncertain duration and catastrophic consequences that, if not properly addressed, could lead to one of the most tragic episodes in the history of Latin America and the Caribbean."

On April 19, 2020, the price of oil fell to its lowest level in two decades, reportedly reflecting a significant drop in global demand for energy and rising inventories. Some Eurozone members reportedly argued for the ECB to create a Eurozone "bad bank" to remove billions of euros in non-performing debts from banks' balance sheets to provide more capacity for Eurozone banks at a potentially critical time when banks could see an increase in non-performing loans. The World Bank confirmed that its "pandemic bonds" would pay out $133 billion to the poorest countries affected by the pandemic.

On April 21, 2020, Agricultural Ministers of the G-20 countries released a joint statement that supported measures to "ensure the health, safety, welfare, and mobility of workers in agriculture and throughout the food supply chain." The joint statement also indicated that the G-20 countries would adopt measures that are "targeted, proportionate, transparent, and temporary, and that they do not create unnecessary barriers to trade or disruption to global food supply chains." The statement also indicated that the G-20 would, "guard against any unjustified restrictive measures that could lead to excessive food price volatility in international markets and threaten the food security and nutrition of large proportions of the world population, especially the most vulnerable living in environments of low food security."

On April 23, 2020, the House passed H.R. 266 ( P.L. 116-139 ), the Paycheck Protection Program and Health Care Enhancement Act, following similar actions by the Senate the previous day. The measure will provide $484 billion for small business loans, health care providers, and COVID-19 testing. The U.S. Labor Department reported that 4.4 million Americans filed for unemployment insurance in the previous week, raising the total that have applied to over 26 million. Indicators of manufacturing and services activity in Europe dropped to their lowest level since 1990, reflecting the impact of the pandemic on the European economy. The Bank of England indicated that it would quadruple its borrowing over the second quarter of 2020, reflecting a contraction in the UK economy, lower tax revenues, and increased financial demands to support fiscal policy measures to fight the pandemic. The Saudi Presidency of the G-20 called on international organizations on April 24, 2020, to fund an emergency response to the pandemic. The Bank of Japan announced on April 27, 2020, that it would purchase unlimited amounts of government bonds and quadruple its purchases of corporate debt to keep interest rates low and stimulate the Japanese economy.

At its April 29, 2020, scheduled meeting, the U.S. Federal Open Market Committee left its main interest rates unchanged, but reiterated its commitment to use "its full range of tools to support the U.S. economy." The policy statement concluded that, "The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term." The Federal Reserve also announced a change in its eligibility requirements for a $500 billion lending program for municipalities. The statement followed the release of the preliminary estimate of U.S. first quarter GDP, which indicated that the economy had contracted by an annualized rate of 4.8%.

On April 30, 2020, the Department of Labor released its weekly data on applications for unemployment insurance, which indicated that an additional 3.8 million people had filed for unemployment insurance during the week, raising the total number who have applied to 30 million. The Federal Reserve also announced an expansion in its medium-size business loan program by allowing firms with up to 15,000 employees or with revenues up to $5 billion to access a new $600 billion program. In addition, the Fed lowered the minimum loan amount for small businesses and announced a loan program to assist riskier businesses. At the same time, the ECB expanded a record low-interest rate loan program for Eurozone banks to support economic activity, while warning that the Eurozone economy could contract between 5% and 12% in 2020 as it faces, "an economic contraction of a magnitude and speed that are unprecedented in peacetime." The ECB also announced a new non-targeted low-interest rate pandemic emergency longer-term refinancing operation (PELTROs) to complement its Pandemic Emergency Refinance Operations announced in March. House Speaker Pelosi stated that House Democrats were considering a $1 trillion spending bill to support state and local governments. In a development that seemed incongruous with the broader economic situation, between April 1, 2020, and April 30, 2020, the DJIA rose more than 3,400 points, or 16%, marking the strongest monthly increase since 1987.

May 2020

On May 5, 2020, Germany's Constitutional court issued a ruling that could prevent the German central bank, the Bundesbank, from making additional bond purchases under the Pandemic Emergency Purchase Program (PEPP). The ECB's program is intended to ease borrowing costs across the Eurozone to stimulate economic growth.

The U.S. Census Bureau reported on May 5 that U.S. exports and import fell in March; exports fell by a greater amount than imports, thereby increasing the monthly U.S. goods and services trade deficit. The trade balance for March was -$44.5 billion, an increase of about $4.6 billion over the trade deficit in February. The decline in export and import values reflected lower imports and exports of both goods and services.

On May 6, 2020, the European Commission released its economic forecast, which indicated that economic activity in the EU would decline by 7.4% in 2020 as a result of measures to contain the pandemic. The Commission forecast that economic growth would advance by 6.0% in 2021, assuming the containment measures can be lifted gradually, the viral effects remain contained, and that the fiscal and monetary measures implemented by the EU members are effective in blunting the negative effects on economies. On May 7, the Labor Department announced that 3.2 million Americans had filed for unemployment insurance during the week, raising the total that had filed over the previous seven weeks to 33 million.

On May 8, the U.S. Department of Labor announced that 20.5 million Americans had lost their jobs in April, pushing the national unemployment rate to 14.5%. Despite the rise in the unemployment rate, the DJIA rose by 2.0%, reportedly based on optimism that the monetary policy actions the Federal Reserve, the ECB, and the Bank of Japan have taken to support financial markets and optimism that the health crisis is ebbing.

On May 12, House Democrats proposed a $3 trillion supplemental spending bill to provide additional financial resources to state and local governments and for other purposes. On May 13, the UK Office of National Statistics reported that UK GDP contracted by 2.0% in the first quarter, the largest decline in the UK's GDP since 2008 with all major economic sector affected. On May 14, the U.S. Department of Labor announced that an additional 3.0 million Americans had filed for unemployment insurance during the previous week, increasing the total number filing for unemployment insurance over the previous eight weeks to 36 million.

Policy Responses

In response to growing concerns over the global economic impact of the pandemic, G-7 finance ministers and central bankers released a statement on March 3, 2020, indicating they will "use all appropriate policy tools" to sustain economic growth. The Finance Ministers also pledged fiscal support to ensure health systems can sustain efforts to fight the outbreak. In most cases, however, countries have pursued their own divergent strategies, in some cases including banning exports of medical equipment. Following the G-7 statement, the U.S. Federal Reserve (Fed) lowered its federal funds rate by 50 basis points, or 0.5%, to a range of 1.0% to 1.25% due to concerns about the "evolving risks to economic activity of the COVID-19." At the time, the cut was the largest one-time reduction in the interest rate by the Fed since the global financial crisis.

After a delayed response, other central banks have begun to follow the actions of the G-7 countries. Most central banks have lowered interest rates and acted to increase liquidity in their financial systems through a combination of measures, including lowering capital buffers and reserve requirements, creating temporary lending facilities for banks and businesses, and easing loan terms. In addition, national governments have adopted various fiscal measures to sustain economic activity. In general, these measures include making payments directly to households, temporarily deferring tax payments, extending unemployment insurance, and increasing guarantees and loans to businesses.

See the Appendix to this report for detailed information about the policy actions by individual governments.

The United States

Recognizing the growing impact the pandemic is having on financial markets and economic growth, the Federal Reserve (Fed) has taken a number of steps to promote economic and financial stability involving the Fed's monetary policy and "lender of last resort" roles. Some of these actions are intended to stimulate economic activity by reducing interest rates and others are intended to provide liquidity to financial markets so that firms have access to needed funding. In announcing its decisions, the Fed indicated that "[t]he COVID-19 outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. " On March 31, 2020, the Trump Administration announced that it was suspending for 90 days tariffs it had placed on imports of apparel and light trucks from China, but not on other consumer goods and metals.

In a speech on May 13, Federal Reserve Chairman Jerome Powell stated that the Federal Reserve's analysis indicated that of individuals working in February, "almost 40 percent of those in households making less than $40,000 a year had lost a job in March." Chairman Powell also indicated that given the extraordinary nature of the current economic downturn that the Fed would, "continue to use our tools to their fullest until the crisis has passed and the economic recovery is well under way." In characterizing the current challenges, Powell stated

The overall policy response to date has provided a measure of relief and stability, and will provide some support to the recovery when it comes. But the coronavirus crisis raises longer-term concerns as well. The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy. Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers' careers as their skills lose value and professional networks dry up, and leave families in greater debt. The loss of thousands of small- and medium-sized businesses across the country would destroy the life's work and family legacy of many business and community leaders and limit the strength of the recovery when it comes. These businesses are a principal source of job creationâsomething we will sorely need as people seek to return to work. A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement. The result could be an extended period of low productivity growth and stagnant incomes.

On April 29, the Bureau of Economic Analysis released first quarter U.S. GDP data indicating that the U.S. economy had contracted by 4.8% at an annual rate, as indicated in Figure 6 . A decline in economic activity of 30% or more was recorded in motor vehicles and parts, recreation, food services and accommodation and transportation sectors, reflecting the quarantine measures adopted across the country. In contrast to the other sectors of the economy, food and beverage consumption increased by 25% as a result of the switch by individuals from eating at restaurants and other commercial food service establishments to preparing and eating food at home.

On May 5, 2020, the U.S. Census Bureau reported an increase in the overall U.S. trade deficit on a month-to-month basis of $4.5 billion, reflecting lower amounts of exports and imports of both goods and services. Exports and imports of both goods and services fell from the previous month, although the deficit in goods trade imports increased from $61 billion in February to $65.6 billion in March; the surplus in services trade fell from $21.23 billion to $21.18 billion.

On May 8, the Department of Labor reported that the U.S. non-farm unemployment rate in April increased by 20 million, raising the total number of unemployed Americans to 23 million, or an unemployment rate of 14% of a total civilian labor force of 156 million. The unemployment rate does not include approximately 10 million workers who are involuntarily working part-time and another 9 million individuals seeking employment. As indicated in Figure 7 , the number of unemployed individuals increased the most in the leisure and hospitality sector, reflecting national quarantining policies to reduce the spread of COVID-19 through social contact. The employment losses were widely spread across the economy, affecting every non-farm sector and all labor groups.

Monetary Policy124

Forward Guidance

Forward guidance refers to Fed public communications on its future plans for short-term interest rates, and it took many forms following the 2008 financial crisis. As monetary policy returned to normal in recent years, forward guidance was phased out. It is being used again today. For example, when the Fed reduced short-term rates to zero on March 15, it announced that it "expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals."

Quantitative Easing

Large-scale asset purchases, popularly referred to as quantitative easing or QE , were also used during the financial crisis. Under QE, the Fed expanded its balance sheet by purchasing securities. Three rounds of QE from 2009 to 2014 increased the Fed's securities holdings by $3.7 trillion.

On March 23, the Fed announced that it would increase its purchases of Treasury securities and mortgage-backed securities (MBS)âincluding commercial MBSâissued by government agencies or government-sponsored enterprises to "the amounts needed to support smooth market functioning and effective transmission of monetary policy.... " These would be undertaken at the unprecedented rate of up to $125 billion daily during the week of March 23. As a result, the value of the Fed's balance sheet is projected to exceed its post-financial crisis peak of $4.5 trillion. One notable difference from previous rounds of QE is that the Fed is purchasing securities of different maturities, so the effect likely will not be concentrated on long-term rates.

Actions to Provide Liquidity

Reserve Requirements

On March 15, the Fed announced that it was reducing reserve requirementsâthe amount of vault cash or deposits at the Fed that banks must hold against depositsâto zero for the first time ever. As the Fed noted in its announcement, because bank reserves are currently so abundant, reserve requirements "do not play a significant role" in monetary policy.

Term Repos

The Fed can temporarily provide liquidity to financial markets by lending cash through repurchase agreements (repos) with primary dealers (i.e., large government securities dealers who are market makers). Before the financial crisis, this was the Fed's routine method for targeting the federal funds rate. Following the financial crisis, the Fed's large balance sheet meant that repos were no longer needed, until they were revived in September 2019. On March 12, the Fed announced it would offer a three-month repo of $500 billion and a one-month repo of $500 billion on a weekly basis through the end of the month in addition to the shorter-term repos it had already been offering. These repos would be larger and longer than those offered since September. On March 31, the Fed announced the Foreign and International Monetary Authorities (FIMA) Repo Facility, which works like the foreign repo pool in reverse. This facility allows foreign central banks to convert their U.S. Treasury holdings into U.S. dollars on an overnight basis. The Fed will charge a (typically) above market interest rate of 0.25 percentage points above the interest rate paid on bank reserves. The facility is intended to work in tandem with currency swap lines to provide additional dollars to meet global demand and is available to a broader group of central banks than the swap lines.

Discount Window

In its March 15 announcement, the Fed encouraged banks (insured depository institutions) to borrow from the Fed's discount window to meet their liquidity needs. This is the Fed's traditional tool in its "lender of last resort" function. The Fed also encouraged banks to use intraday credit available through the Fed's payment systems as a source of liquidity.

Foreign Central Bank Swap Lines

Both domestic and foreign commercial banks rely on short-term borrowing markets to access U.S. dollars needed to fund their operations and meet their cash flow needs. But in an environment of strained liquidity, only banks operating in the United States can access the discount window. Therefore, the Fed has standing "swap lines" with major foreign central banks to provide central banks with U.S. dollar funding that they can in turn lend to private banks in their jurisdictions. On March 15, the Fed reduced the cost of using those swap lines and on March 19 it extended swap lines to nine more central banks. On March 31, 2020, the Fed set up a new temporary facility to work in tandem with the swap lines to provide additional dollars to meet global demand. The new facility allows central banks and international monetary authorities to exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions.

Emergency Credit Facilities for the Nonbank Financial System

In 2008, the Fed created a series of emergency credit facilities to support liquidity in the nonbank financial system. This extended the Fed's traditional role as lender of last resort from the banking system to the overall financial system for the first time since the Great Depression. To create these facilities, the Fed relied on its emergency lending authority (Section 13(3) of the Federal Reserve Act). To date, the Fed has created six facilitiesâsome new, and some reviving 2008 facilitiesâin response to COVID-19.

On March 17, the Fed revived the commercial paper funding facility to purchase commercial paper, which is an important source of short-term funding for financial firms, nonfinancial firms, and asset-backed securities (ABS). Like banks, primary dealers are heavily reliant on short-term lending markets in their role as securities market makers. Unlike banks, they cannot access the discount window. On March 17, the Fed revived the primary dealer credit facility, which is akin to a discount window for primary dealers. Like the discount window, it provides short-term, fully collateralized loans to primary dealers. On March 19, the Fed created the Money Market Mutual Fund Liquidity Facility (MMLF), similar to a facility created during the 2008 financial crisis. The MMLF makes loans to financial institutions to purchase assets that money market funds are selling to meet redemptions. On March 23, the Fed created two facilities to support corporate bond marketsâthe Primary Market Corporate Credit Facility to purchase newly issued corporate debt and the Secondary Market Corporate Credit Facility to purchase existing corporate debt on secondary markets. On March 23, the Fed revived the Term Asset-Backed Securities Loan Facility to make nonrecourse loans to private investors to purchase ABS backed by various nonmortgage consumer loans. On April 6, the Fed announced the Payroll Protection Program Lending Facility (PPPLF) to provide credit to depository institutions (e.g., banks) making loans under the CARES Act ( H.R. 748 / P.L. 116-136 ) Payroll Protection Program . Because banks are not required to hold capital against these loans, this facility increases lending capacity for banks facing high demand to originate these loans. The PPP provides low-cost loans to small businesses to pay employees. These loans do not pose credit risk to the Fed because they are guaranteed by the Small Business Administration. On April 9, the Fed announced the Main Street Lending Program (MSLP), which purchases loans from depository institutions to businesses with up to 10,000 employees or up to $2.5 billion in revenues. The loans to businesses would defer principal and interest repayment for one year, and the businesses would have to make a "reasonable effort" to retain employees. On April 9, the Fed announced the Municipal Liquidity Facility (MLF) to purchase state and municipal debt in response to higher yields and reduced liquidity in that market. The facility will only purchase debt of larger counties and cities.

Many of these facilities are structured as special purpose vehicles controlled by the Fed because of restrictions on the types of securities that the Fed can purchase. Although there were no losses from these facilities during the financial crisis, assets of the Treasury's Exchange Stabilization Fund have been pledged to backstop any losses on several of the facilities today.

Fiscal Policy

In terms of a fiscal stimulus, Congress adopted H.R. 6074 on March 5, 2020 ( P.L. 116-123 ), to appropriate $8.3 billion in emergency funding to support efforts to fight COVID-19; President Trump signed the measure on March 6, 2020. President Trump also signed on March 18, H.R. 6201 ( P.L. 116-127 ), the Families First COVID-19 Response Act, that provides paid sick leave and free COVID-19 testing, expands food assistance and unemployment benefits, and requires employers to provide additional protections for health care workers. Other countries have indicated they will also provide assistance to workers and to some businesses. Congress also is considering other possible measures, including contingency plans for agencies to implement offsite telework for employees, financial assistance to the shale oil industry, a reduction in the payroll tax, and extended of the tax filing deadline. President Trump has taken additional actions, including

Announcing on March 11, 2020, restrictions on all travel from Europe to the United States for 30 days, directing the Small Business Administration (SBA) to offer low-interest loans to small businesses, and directing the Treasury Department to defer tax payments penalty-free for affected businesses. Declaring on March 13, a state of emergency that frees up disaster relief funding to assist state and local governments to address the effects of the pandemic. The President also announced additional testing for the virus, a website to help individuals identify symptoms, increased oil purchases for the Strategic Oil Reserve, and a waiver on interest payments on student loans. Invoking on March 18, 2020, the Defense Production Act (DPA) that gives him the authority to require some U.S. businesses to increase production of medical equipment and supplies that are in short supply.

On March 25, 2020, the Senate adopted the COVID-19 Aid, Relief, and Economic Security Act ( S. 3548 ) to formally implement President Trump's proposal by providing direct payments to taxpayers, loans and guarantees to airlines and other industries, and assistance for small businesses, actions similar to those of various foreign governments. The House adopted the measure as H.R. 748 on March 27, and President Trump signed the measure ( P.L. 116-136 ) on March 27. The law

Provides funding forÂ $1,200 tax rebates to individuals, with additional $500 payments per qualifying child. The rebate begins phasing out when incomes exceed $75,000 (or $150,000 for joint filers). Assists small businesses by providing funding for, forgivable bridge loans; and additional funding for grants and technical assistance; authorizes emergency loans to distressed businesses, including air carriers, and suspends certain aviation excise taxes. Creates a $367 billion loan program for small businesses, establishes a $500 billion lending fund for industries, cities and states, a $150 billion for state and local stimulus funds, and $130 billion for hospitals. Increases unemployment insurance benefits, expands eligibility and offer workers an additional $600 a week for four month, in addition to state unemployment programs. Establishes special rules for certain tax-favored withdrawals from retirement plans; delays due dates for employer payroll taxes and estimated tax payments for corporations; and revises other provisions, including those related to losses, charitable deductions, and business interest. Provides additional funding for the prevention, diagnosis, and treatment of COVID-19; limits liability for volunteer health care professionals; prioritizes Food and Drug Administration (FDA) review of certain drugs; allows emergency use of certain diagnostic tests thatÂ are not approved by the FDA; expands health-insurance coverage for diagnostic testing and requires coverage for preventative services and vaccines; and revises other provisions, including those regarding the medical supply chain, the national stockpile, the health care workforce, the Healthy Start program, telehealth services, nutrition services, Medicare, and Medicaid. Temporarily suspends payments for federal student loans and revises provisions related to campus-based aid, supplemental educational-opportunity grants, federal work-study, subsidized loans, Pell grants, and foreign institutions. Authorizes the Department of the TreasuryÂ temporarily to guarantee money-market funds.

On April 23, 2020, the House passed H.R. 266 ( P.L. 116-139 ), the Paycheck Protection Program and Health Care Enhancement Act, following similar actions by the Senate the previous day. The measure provides $484 billion for small business loans, health care providers, and COVID-19 testing. In particular, the law

Provides additional lending authority for certain Small Business Administration (SBA) programs in response to COVID-19 increases the authority for (1) the Paycheck Protection Program, under which the SBA may guarantee certain loans to small businesses during the COVID-19 pandemic; and (2) advances on emergency economic injury disaster loans made in response to COVID-19. The division also expands eligibility for such disaster loans and advances to include agricultural enterprises. Provides $100 billion in FY2020 supplemental appropriations to HHS for the Public Health and Social Services Emergency Fund, including $75 billion to reimburse health care providers for health care related expenses or lost revenues that are attributable to the coronavirus outbreak; and $25 billion for expenses to research, develop, validate, manufacture, purchase, administer, and expand capacity for COVID-19 tests to effectively monitor and suppress COVID-19. Allocates specified portions of the $25 billion for COVID-19 testing to states, localities, territories, and tribes; the Centers for Diseases Control and Prevention; the National Institutes of Health; the Biomedical Advanced Research and Development Authority; the Food and Drug Administration; community health centers; rural health clinics; and testing for the uninsured.

On May 12, House Democrats proposed a $3 trillion supplemental spending bill to provide additional financial resources to state and local governments. The bill reportedly would also

Appropriate $200 billion in hazard pay to essential workers. Extend additional payments to individuals, for nutrition and housing assistance, and provide funding for additional testing and contact tracing. Restore the tax deduction for state and local taxes.

For additional information about the impact of COVID-19 on the U.S. economy see CRS Insight IN11235, COVID-19: Potential Economic Effects .

Europe

To date, European countries have not displayed a synchronized policy response similar to the one they developed during the 2008-2009 global financial crisis. Instead, they have used a combination of national fiscal policies and bond buying by the ECB to address the economic impact of the pandemic. Individual countries have adopted quarantines and required business closures, travel and border restrictions, tax holidays for businesses, extensions of certain payments and loan guarantees, and subsidies for workers and businesses. The European Commission has advocated for greater coordination among the EU members in developing and implementing monetary and fiscal policies to address the economic fallout from the viral pandemic.

In its May 2020 economic forecast, the European Commission forecasted that EU GDP in 2020 would fall by 7.4% and the unemployment rate would rise to 9.0%, as indicated in Table 3 . The Commission stated that, "Given the severity of this unprecedented worldwide shock, it is now quite clear that the EU has entered the deepest economic recession in its history." In addition, the Commission forecasted that EU GDP would rise rapidly in 2021, although not fast enough to erase all the 2020 decline, but would exhibit a distinct "V" shaped recession and recovery. Greece, Spain, France, and Italy are forecasted to experience the largest declines in GDP in 2020 as a result of their dependence on tourism, which is expected to experience a slow economic recovery. Germany and other Northern European countries are projected to experience a more modest decline in economic activity. Some analysts argue that this disparity in economic effects may complicate efforts to coordinate economic policies. To address the crisis, the Commission argued that, "[t]he riskâ¦.is that the crisis will lead to severe distortions within the Single Market and to entrenched economic, financial and social divergences between euro area Member States that could ultimately threaten the stability of the Economic and Monetary Union."

Pandemic-related economic effects reportedly are having a significant impact on business activity in Europe, with some indexes falling farther then they had during the height of the financial crisis and others indicating that Europe may well experience a deep economic recession in 2020. France, Germany, Italy, Spain, and the UK reported steep drops in industrial activity in March 2020. EU countries have issued travel warnings, banning all but essential travel across borders, raising concerns that even much-needed medical supplies could stall at borders affected by traffic backups. The travel bans and border closures reportedly are causing shortages of farm laborers in Germany, the UK, and Spain, which has caused growers to attempt to recruit students and workers laid off because of the pandemic.

In previous actions, the European Commission had announced that it was relaxing rules on government debt to allow countries more flexibility in using fiscal policies. Also, the European Central Bank (ECB) announced that it was ready to take "appropriate and targeted measures," if needed. France, Italy, Spain and six other Eurozone countries have argued for creating a "coronabond," a joint common European debt instrument. Similar attempts to create a common Eurozone-wide debt instrument have been opposed by Germany and the Netherland, among other Eurozone members. With interest rates already low, however, it indicated that it would expand its program of providing loans to EU banks, or buying debt from EU firms, and possibly lowering its deposit rate further into negative territory in an attempt to shore up the Euro's exchange rate. ECB President-designate Christine Lagarde called on EU leaders to take more urgent action to avoid the spread of COVID-19 from triggering a serious economic slowdown. The European Commission indicated that it was creating a $30 billion investment fund to address COVID-19 issues. In other actions

On March 12, 2020, the ECB decided to (1) expand its longer-term refinance operations (LTRO) to provide low-cost loans to Eurozone banks to increase bank liquidity; (2) extend targeted longer-term refinance operations (TLTRO) to provide loans at below-market rates to businesses, especially small and medium-sized businesses, directly affected by COVID-19; (3) provide an additional â¬120 billion (about $130 billion) for the Bank's asset purchase program to provide liquidity to firms that was in addition to â¬20 billion a month it previously had committed to purchasing. On March 13, 2020, financial market regulators in the UK, Italy, and Spain intervened in stock and bond markets to stabilize prices after historic swings in indexes on March 12, 2020. In addition, the ECB announced that it would do more to assist financial markets in distress, including altering self-imposed rules on purchases of sovereign debt. Germany's Economic Minister announced on March 13, 2020, that Germany would provide unlimited loans to businesses experiencing negative economic activity (initially providing $555 billion), tax breaks for businesses, and export credits and guarantees. On March 18, the ECB indicated that it would: create a â¬750 billion (about $800 billion) Pandemic Emergency Purchase Program to purchase public and private securities; expand the securities it will purchase to include nonfinancial commercial paper; and ease some collateral standards. In announcing the program, President-designate Lagarde indicated that the ECB would, "do everything necessary." In creating the program, the ECB removed or significantly loosened almost all constraints that applied to previous asset-purchase programs, including a self-imposed limit of buying no more than one-third of any one country's eligible bonds, a move that was expected to benefit Italy. The ECB also indicated that it would make available up to â¬3 trillion in liquidity through refinancing operations. Britain ($400 billion) and France ($50 billion) also announced plans to increase spending to blunt the economic effects of the virus. Recent forecasts indicate that the economic effect of COVID-19 could push the Eurozone into an economic recession in 2020. On March 23, 2020, Germany announced that it would adopt a â¬750 billion (over $800 billion) package in economic stimulus funding. On April 15, Eurozone finance ministers announced a â¬500 billion (about $550 billion) emergency spending package to support governments, businesses, and workers and will provide funds to the European Stability Mechanism, the European Investment Bank, and for unemployment insurance.

On May 5, 2020, Germany's Constitutional Court issued a ruling challenging the legality of a bond-buying program conducted by the ECB since 2015, the Public Sector Purchase Program (PSPP). In its ruling, the court directed the German government to request clarification from the ECB about various aspects of the PSPP program that the court argued might exceed the ECB's legal mandate. The German government has not yet indicated how it will formally respond to the ruling, but many analysts contend that the rulingâand the challenge to the authority of the ECB and the European Court of Justiceâcould have far-reaching implications for future ECB activities. This could potentially include challenges to the ECB's Pandemic Emergency Purchase Program (PEPP) initiated in March. The PEPP is a temporary program that authorizes the ECB to acquire up to â¬750 billion (about $820 billion) in private and public sector securities to address the economic effects of the pandemic crisis.

The German court's ruling has heightened tensions between the court and the European Court of Justice. Following the 2008-2009 financial crisis and the subsequent Eurozone financial crisis, the ECB launched four asset purchase programs in 2014 to provide assistance to financially strapped Eurozone governments and to sustain financial liquidity in Eurozone banks. Those programs included the Corporate Sector Purchase Program (CSPP), the Public Sector Purchase Program (PSPP), the Asset-Backed Securities Purchase Program (ABSPP), and the Third Covered Bond Purchase Program (CBPP3). The programs operated from 2014 to 2018; the PSPP was restarted in November 2019. As of May 8, the PSPP program held â¬2.2 trillion (about $2.5 trillion) with another â¬600 billion (about $700 billion) held under other asset purchase programs. Various groups in Germany challenged the legality of the ECB bond-buying programs before the German Constitutional Court arguing that the programs exceeded the ECB's legal mandate. In turn, the German court referred the case to the European Court of Justice, which ruled in December 2019 that the ECB's actions were fully within the ECB's authority.

In the German Constitutional Court's May 5 ruling, the German judges characterized the ECJ's ruling as "incomprehensible," and directly challenged the ECB and the European Court of Justice and the primacy of the European Court of Justice ruling over national law. The German justices argued that the ECB had exceeded its authority by not fully evaluating the economic costs and benefits of previous bond-buying activities, including the impact on national budgets, property values, stock markets, life insurance and other economic effects. The German court also argued that the ECB's lack of a strategy for reducing its holdings of sovereign debt of Eurozone members increased risks for national governments that back up the ECB, and it challenged the ECB's strategy for reducing its holdings of sovereign debt.

The United Kingdom

The United Kingdom has taken a number of steps to support economic activity. These steps are expected to limit the damage to the UK economy. The Bank of England (BOE) forecasted in May 2020 that the UK economy would contract by 30% in the first half of 2020, but then rebound sharply in the second half of the year, exhibiting a "V" shaped recovery. The Bank of England has announced a number of policy initiatives including

On March 11, the BOE adopted a package of four measures to deal with any economic disruptions associated with COVID-19. The measures included an unscheduled cut in the benchmark interest rate by 50 basis points (0.5%) to a historic low of 0.25%; the reintroduction of the Term Funding Scheme for Small and Medium-sized Enterprises (TFSME) that provides banks with over $110 billion for loans at low interest rates; a lowering of banks' countercyclical capital buffer from 1% to zero, which is estimated to support over $200 billion of bank lending to businesses; and a freeze in banks' dividend payments. On March 15, the BOE reinstituted U.S. dollar swap lines with the Federal Reserve. On March 17, the BOE and the UK Treasury introduced the COVID Corporate Financing Facility (CCFF) to provide assistance to UK firms to bridge through Covid-19-related disruptions to their cash flow. On March 19, during a Special Monetary Policy Meeting, the Bank of England reduced its main interest rate to 0.1%, increased the size of its TFSME fund, and increased the stock of asset purchases by Â£200 billion to a total of Â£645 billion financed by issuing UK government bonds and some additional non-financial investment-grade corporate bonds. On March 20, the BOE participated in an internationally coordinated central bank expansion of liquidity through U.S. standing dollar liquidity swap line arrangements. On March, the BOE activated the Contingent Term Repo Facility (CTRF). On April 6, announced the activation of the TFSME ahead of schedule. On April 23, the Bank of England indicated it would quadruple its borrowing over the second quarter of 2020, reflecting a contraction in the UK economy, lower tax revenues, and increased financial demands to support fiscal policy measures.

In terms of fiscal policy, UK Chancellor of the Exchequer Rishi Sunak proposed a national budget on March 11, 2020, that included nearly $3.5 billion in fiscal spending to counter adverse economic effects of the pandemic and increased in statutory sick leave by about $2.5 billion in funds to small and medium businesses to provide up to 14 days of sick leave for affected employees. The plan provides affected workers up to 80% of their salary, or up to Â£2,500 a month (about $2,800) if they are laid off. Some estimates indicate that UK spending to support its economy could rise to about $60 billion in 2020. Identified as the Coronavirus Job Retention Scheme (CJRS), the program was backdated to start on March 1 and had been expected to run through May, but was extended to expire the end of June 2020. Prime Minister Johnson also announced that all pubs, cafÃ©s, restaurants, theatres, cinemas, nightclubs, gyms and leisure centers would be closed. Part of the fiscal spending package includes open-ended funding for the National Health Service (NHS), $6 billion in emergency funds to the NHS, $600 million hardship fund to assist vulnerable people, and tax cuts and tax holidays for small businesses in certain affected sectors.

Japan

The Bank of Japan, with already-low interest rates, injected $4.6 billion in liquidity into Japanese banks to provide short-term loans for purchases of corporate bonds and commercial paper and twice that amount into exchange traded funds to aid Japanese businesses. The Japanese government also pledged to provide wage subsidies for parents forced to take time off due to school closures. On March 24, 2020, Japan announced that the Summer Olympics set to take place in Tokyo would be postponed by a year, delaying an expected boost to the Japanese economy that was expected from the event. Japan reportedly is considering an emergency fiscal package of about $515 billion, roughly equivalent to 10% of Japan's annual gross domestic product (GDP). On April 27, 2020, the Bank of Japan announced it would purchase unlimited amounts of government bonds and quadruple its purchases of corporate debt to keep interest rates low and stimulate the Japanese economy.

China

According to a recent CRS In Focus, China's economic growth could go negative in the first quarter of 2020 and fall below 5% for the year, with more serious effects if the outbreak continues. In early February, China's central bank pumped $57 billion into the banking system, capped banks' interest rates on loans for major firms, and extended deadlines for banks to curb shadow lending. The central bank has been setting the reference rate for China's currency stronger than its official close rate to keep it stable. On March 13, 2020, The People's Bank of China announced that it would provide $78.8 billion in funding, primarily to small businesses, by reducing bank's reserve requirements.

The International Monetary Fund (IMF) is providing funding to poor and emerging market economies that are short on financial resources. If the economic effects of the virus persist, countries may need to be proactive in coordinating fiscal and monetary policy responses, similar to actions taken by of the G-20 following the 2008-2009 global financial crisis.

Multilateral Response

International Monetary Fund

The IMF initially announced that it was making available about $50 billion for the global crisis response. Following a G20 ministerial call on March 23, IMF Managing Director Kristalina Georgieva announced that the Fund is ready to deploy all of its $1 trillion capacity. The Fund is also exploring options to quickly raise financing foremost of which is finalizing agreement on a 2019 agreement to renew and augment the IMF's New Arrangements to Borrow (NAB), a credit line that augments IMF quota resources. Other options to increase IMF resources include a new allocation of special drawing rights (SDRs), sale of IMF gold holdings, selling IMF bonds, developing an expanded network of central bank swap arrangements centered at the IMF.

For low-income countries, the IMF is providing rapid-disbursing emergency financing of up to $10 billion (50% of quota of eligible members) that can be accessed without a full-fledged IMF program. Other IMF members can access emergency financing through the Fund's Rapid Financing Instrument (RFI). This facility could provide about $40 billion for emerging markets facing fiscal pressures from COVID-19. Separate from these resources, the IMF has a Catastrophe Containment and Relief Trust (CCRT), which provides eligible countries with up-front grants for relief on IMF debt service falling due. The CCRT was used during the 2014 Ebola outbreak, but is now underfunded, according to IMF Managing Director Georgieva with just over $200 million available against possible needs of over $1 billion. On March 11, 2020, the United Kingdom announced that it will contribute Â£150 million (about $170 million) to the CCRT. To date, the United States has not contributed to the CCRT.

World Bank and Regional Development Banks

The World Bank announced on March 2 that it is making up to $12 billion in financing ($8 billion of which is new) immediately available to help impacted developing countries. This support comprises up to $2.7 billion in new financing from the International Bank for Reconstruction and Development (IBRD), the World Bank's market-rate lending facility for middle-income developing countries, and $1.3 billion from the International Development Association (IDA), the World Bank's concessional facility for low-income countries. In addition, the Bank is reprioritizing $2 billion of the Bank's existing portfolio. The International Finance Corporation (IFC), the Bank's private-sector lending arm is making available up to $6 billion. According to the Bank, support will cover a wide range of activities, including strengthening health services and primary health care, bolstering disease monitoring and reporting, training front line health workers, encouraging community engagement to maintain public trust, and improving access to treatment for the poorest patients.

Several years ago, the World Bank introduced pandemic bonds, a novel form of catastrophe financing. The Bank sold two classes of bonds worth $320 million in a program designed to provide financing to developing countries facing an acute epidemic crisis if certain triggers are met. Once these conditions are met, bondholders no longer receive interest payments on their investments, the money is no longer repaid in full, and funds are used to support the particular crisis. In the case of COVID-19, for the bonds to be triggered, the epidemic must be continuing to grow 12 weeks after the first day of the outbreak. Critics have raised a range of concerns about the bonds, arguing that the terms are too restrictive and that the length of time needs to be shortened before triggering the bonds. Others stress that the proposal remains valid â shifting the cost of pandemic assistance from governments to the private sector, especially in light of the failure of past efforts to rally donor support to establish multilateral pandemic funds.

The Asian Development Bank (ADB) has approved a total of $4 million to help developing countries in Asia and the Pacific. Of the total, $2 million is for improving the immediate response capacity in Cambodia, China, Laos, Myanmar, Thailand, and Vietnam; $2 million will be available to all ADB developing member countries in updating and implementing their pandemic response plans. The ADB also provided a private sector loan of up to $18.6 million to Wuhan-based Jointown Pharmaceutical Group Co. Ltd. to enhance the distribution and supply of essential medicines and protective equipment.

International Economic Cooperation

On March 16, 2020, the leaders of the G-7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) held an emergency summit by teleconference to discuss and coordinate their policy responses to the economic fallout from the global spread of COVID-19. In the joint statement released by the G-7 leaders after the emergency teleconference summit, the leaders stressed they are committed to doing "whatever is necessary to ensure a strong global response through closer cooperation and enhanced cooperation of efforts." The countries pledged to coordinate research efforts, increase the availability of medical equipment; mobilize "the full range" of policy instruments, including monetary and fiscal measures as well as targeted actions, to support workers, companies, and sectors most affected by the spread of COVID-19; task the finance ministers to coordinate on a weekly basis, and direct the IMF and the World Bank Group, as well as other international organizations, to support countries worldwide as part of a coordinated global response.

Saudi Arabia, the 2020 chair of the G-20, called an emergency G-20 summit on March 25 to discuss a response to the pandemic. The G-20 is a broader group of economies, including the G-7 countries and several major emerging markets. During the global financial crisis, world leaders decided that henceforth the G-20 would be the premiere forum for international economic cooperation. Some analysts have been surprised that the G-7 has been in front of the G-20 in responding to COVID-19, while other analysts have questioned whether the larger size and diversity of economies in the G-20 can make coordination more difficult.

Analysts are hopeful that the recent G-7 summit, and a G-20 summit, will mark a shift towards greater international cooperation at the highest (leader) levels in combatting the economic fallout from the spread of COVID-19. An emergency meeting of G-7 finance ministers on March 3, 2020, fell short of the aggressive and concrete coordinated action that investors and economists had been hoping for, and U.S. and European stock markets fell after the meeting. More generally, governments have been divided over the appropriate response and in some cases have acted unilaterally, particularly when closing borders and imposing export restrictions on medical equipment and medicine. Some experts argue that a large, early, and coordinated response is needed to address the economic fallout from COVID-19, but several concerns loom about the G-20's ability to deliver. Their concerns focus on the Trump Administration's prioritization of an "America First" foreign policy over one committed to multilateralism; the 2020 chair of the G-20, Saudi Arabia, is embroiled in its own domestic political issues and oil price war; and U.S.-China tensions make G-20 consensus more difficult.

Meanwhile, international organizations including the IMF and multilateral development banks, have tried to forge ahead with economic support given their current resources. Additionally, the Financial Stability Board (FSB), an international body including the United States that monitors the global financial system and makes regulations to ensure stability, released a statement on March 20, 2020, that its members are actively cooperating to maintain financial stability during market stress related to COVID-19. The FSB is encouraging governments to use flexibility within existing international standards to provide continued access to funding for market participants and for businesses and households facing temporary difficulties from COVID-19, while noting that many FSB members have already taken action to release available capital and liquidity buffers.

Estimated Effects on Developed and Major Economies

Among most developed and major developing economies, economic growth at the beginning of 2020 was tepid, but still was estimated to be positive. Countries highly dependent on tradeâCanada, Germany, Italy, Japan, Mexico, and South Koreaâand commodity exporters are now projected to be the most negatively affected by the slowdown in economic activity associated with the virus. In addition, travel bans and quarantines are taking a heavy economic toll on a broad range of countries. The OECD notes that production declines in China have spillover effects around the world given China's role in producing computers, electronics, pharmaceuticals and transport equipment, and as a primary source of demand for many commodities. Across Asia, some forecasters argue that recent data indicate that Japan, South Korea, Thailand, the Philippines, Indonesia, Malaysia, and Vietnam could experience an economic recession in 2020.

In early January 2020, before the COVID-19 outbreak, economic growth in developing economies as a whole was projected by the International Monetary Fund (IMF) to be slightly more positive than in 2019. This outlook was based on progress being made in U.S.-China trade talks that were expected to roll back some tariffs and an increase in India's rate of growth. Growth rates in Latin America and the Middle East were also projected to be positive in 2020. These projections likely will be revised downward due to the slowdown in global trade associated with COVID-19, lower energy and commodity prices, an increase in the foreign exchange value of the dollar, and other secondary effects that could curtail growth. Commodity exporting countries, in particular, likely will experience a greater slowdown in growth than forecasted in earlier projections as a result of a slowdown on trade with China and lower commodity prices.

Emerging Markets

The combined impact of COVID-19, an increase in the value of the dollar, and an oil price war between Saudi Arabia and Russia are hitting developing and emerging economies hard. Not all of these countries have the resources or policy flexibility to respond effectively. According to figures compiled by the Institute for International Finance (IIF), cumulative capital outflows from developing countries since January 2020 are double the level experienced during the 2008/2009 crisis and substantially higher than recent market events ( Figure 8 ).

The impact of the price war and lower energy demand associated with a COVID-19-related economic slowdown is especially hard on oil and gas exporters, some of whose currencies are at record lows ( Figure 9 ). Oil importers, such as South Africa and Turkey, have also been hit hard; South Africa's rand has fallen 18% against the dollar since the beginning of 2020 and the Turkish lira has lost 8.5%. Some economists are concerned that the depreciation in currencies could lead to rising rates of inflation by pushing up the prices of imports and negatively economic growth rates in 2020.

Depending on individual levels of foreign exchange reserves and the duration of the capital flow slowdown, some countries may have sufficient buffers to weather the slowdown, while others will likely need to make some form of current account adjustment (reduce spending, raise taxes, etc.). Several countries, such as Iran and Venezuela, have already asked the IMF for financial assistance and others are likely to follow. (Venezuela's request was quickly rebuffed due to disagreement among the IMF membership over who is recognized as Venezuela's legitimate leader: NicolÃ¡s Maduro or Juan GuaidÃ³. )

International Economic Cooperation

Initial efforts at coordinating the economic response to the COVID-19 pandemic across countries have been uneven. Governments are divided over the appropriate response and in some cases have acted unilaterally, particularly when closing borders and imposing export restrictions on medical equipment and medicine. An emergency meeting of G-7 (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) finance ministers on March 3, 2020, fell short of the aggressive and concrete coordinated action that investors and economists had been hoping for, and U.S. and European stock markets fell sharply after the meeting. However, on March 16, 2020, the leaders of the G-7 countries held an emergency summit by teleconference to discuss and coordinate their policy responses to the economic fallout from the global spread of COVID-19. In the joint statement released by the G-7 leaders after the emergency teleconference summit, the leaders stressed they are committed to doing "whatever is necessary to ensure a strong global response through closer cooperation and enhanced cooperation of efforts." The countries pledged to coordinate research efforts, increase the availability of medical equipment; mobilize "the full range" of policy instruments, including monetary and fiscal measures, as well as targeted actions to support workers, companies, and sectors most affected by the spread of COVID-19; task the finance ministers to coordinate on a weekly basis, and direct the IMF and the World Bank Group, as well as other international organizations, to support countries worldwide as part of a coordinated global response. G-7 coordination has not been without problems, however, including disagreement among G-7 foreign affairs ministers about how to refer to the virus (coronavirus or the "Wuhan virus") and concerns about collaboration on vaccine research.

The G-20, which has a broader membership of major advanced and emerging-market economies representing 85% of world GDP, was slower to respond to the pandemic. Even though G-20 coordination is widely viewed as critical in the response to the global financial crisis of 2008-2009, several factors may have complicated G-20 coordination in the current context: the Trump Administration's prioritization of an "America First" foreign policy over one committed to multilateralism; the 2020 chair of the G-20, Saudi Arabia, is embroiled in its own domestic political issues and oil price war; and U.S.-China tensions make G-20 consensus more difficult. The G-20 held a summit by teleconference on March 26, 2020, but the resulting communique was criticized for failing to include concrete action items beyond what national governments were already doing. However, G-20 coordination appears to be gaining momentum, most notably with the G-20 agreement on debt relief for low-income countries (see " Looming Debt Crises and Debt Relief Efforts ").

Meanwhile, international organizations including the IMF and multilateral development banks, have tried to forge ahead with economic support given their current resources. Additionally, the Financial Stability Board (FSB), an international body including the United States that monitors the global financial system and makes regulations to ensure stability, released a statement on March 20, 2020, that its members are actively cooperating to maintain financial stability during market stress related to COVID-19. The FSB is encouraging governments to use flexibility within existing international standards to provide continued access to funding for market participants and for businesses and households facing temporary difficulties from COVID-19, while noting that many FSB members have already taken action to release available capital and liquidity buffers.

Looming Debt Crises and Debt Relief Efforts

COVID-19 could trigger a wave of defaults around the world. In Q3 2019âbefore the outbreak of COVID-19âglobal debt levels reached an all-time high of nearly $253 trillion, about 320% of global GDP. About 70% of global debt is held by advanced economies and about 30% is held by emerging markets. Globally, most debt is held by nonfinancial corporations (29%), governments (27%) and financial corporations (24%), followed by households (19%). Debt in emerging markets has nearly doubled since 2010, primarily driven by borrowing from state-owned enterprises.

High debt levels make borrowers vulnerable to shocks that disrupt revenue and inflows of new financing. The disruption in economic activity associated with COVID-19 is a wide-scale exogenous shock that will make it significantly more difficult for many private borrowers (corporations and households) and public borrowers (governments) around the world to repay their debts. COVID-19 has hit the revenue of corporations in a range of industries: factories are ceasing production, brick-and-mortar retail stores and restaurants are closing, commodity prices have plunged (Bloomberg commodity price indexâa basket of oil, metals, and food pricesâhas dropped 27% since the start of the year and is now at its lowest level since 1986), and overseas and in some cases domestic travel is being curtailed.

Households are facing a rapid increase in unemployment and, in many developing countries, a decline in remittances. With fewer resources, corporations and households may default on their debts, absent government intervention. These defaults will result in a decline in bank assets, making it difficult for banks to extend new loans during the crisis or, more severely, creating solvency problems for banks. Meanwhile, many governments are dramatically increasing spending to combat the pandemic, and are likely to face sharp reductions in revenue, putting pressure on public finances and raising the likelihood of sovereign (government) defaults. Debt dynamics are particularly problematic in emerging economies, where debt obligations denominated in foreign currencies (usually U.S. dollars). Many emerging market currencies have depreciated since the outbreak of the pandemic, raising the value of their debts in terms of local currency.

Governments will face difficult choices if there is a widespread wave of defaults. Most governments have signaled a commitment to or already implemented policies to support those economically impacted by the pandemic. These governments face decisions about the type of assistance to provide (loans versus direct payments), the amount of assistance to provide, how to allocate rescue funds, and what conditions if any to attach to funds. Governments have undertaken extraordinary fiscal and monetary measures to combat the crisis. However, developing countries that are constrained by limited financial resources and where health systems could quickly become overloaded are particularly vulnerable.

In terms of defaults by governments (sovereign defaults), emergency assistance is generally provided by the IMF, and sometimes paired with additional rescue funds from other governments on a bilateral basis. The IMF and other potential donor countries will need to consider whether the IMF has adequate resources to respond to the crisis, how to allocate funding if the demand for funding exceeds the amount available, what conditions should be attached to rescue funding, and whether IMF programs should be paired with a restructuring of the government's debt ("burden sharing" with private investors).

International efforts are underway to help the most vulnerable developing countries grapple with debt pressures. In mid-April 2020, the IMF tapped its Catastrophe Containment and Relief Trust (CRRT), funded by donor countries, to provide grants to cover the debt payments of 25 poor and vulnerable countries to the IMF for six months. The IMF hopes that additional donor contributions will allow this debt service relief to be extended for two years. Additionally, the G-20 finance ministers agreed to suspend debt service payments for the world's poorest countries through the end of 2020. The Institute for International Economics, which represents 450 banks, hedge funds, and other global financial funds, also announced that private creditors will join the debt relief effort on a voluntary basis. This debt standstill will free up more than $20 billion for these countries to spend on improving their health systems and fighting the pandemic. Private sector commitments were critical for official creditors, so that developing countries could redirect funds to improving health systems rather than repaying private creditors.

Other Affected Sectors

Public concerns over the spread of the virus have led to self-quarantines, reductions in airline and cruise liner travel, the closing of such institutions as the Louvre, and the rescheduling of theatrical releases of movies, including the sequel in the iconic James Bond series (titled, "No Time to Die"). School closures are affecting 1.5 billion children worldwide, challenging parental leave policies. Other countries are limiting the size of public gatherings.

Some businesses are considering new approaches to managing their workforces and work methods. These techniques build on, or in some places replace, such standard techniques as self-quarantines and travel bans. Some firms are adopting an open-leave policy to ensure employees receive sick pay if they are, or suspect they are, infected. Other firms are adopting paid sick leave policies to encourage sick employees to stay home and are adopting remote working policies. Microsoft and Amazon have instructed all of their Seattle-based employees to work from home until the end of March 2020.

The drop in business and tourist travel is causing a sharp drop in scheduled airline flights by as much as 10%; airlines are estimating they could lose $113 billion in 2020 (an estimate that could prove optimistic given the Trump Administration's announced restrictions on flights from Europe to the United States and the growing list of countries that are similarly restricting flights), while airports in Europe estimate they could lose $4.3 billion in revenue due to fewer flights. Industry experts estimate that many airlines will be in bankruptcy by May 2020 under current conditions as a result of travel restrictions imposed by a growing number of countries. The loss of Chinese tourists is another economic blow to countries in Asia and elsewhere that have benefitted from the growing market for Chinese tourists and the stimulus such tourism has provided.

The decline in industrial activity has reduced demand for energy products such as crude oil, causing prices to drop sharply, which negatively affects energy producers, renewable energy producers, and electric vehicle manufacturers, but generally is positive for consumers and businesses. Saudi Arabia is pushing other OPEC (Organization of the Petroleum Exporting Countries) members collectively to reduce output by 1.5 million barrels a day to raise market prices. U.S. shale oil producers, who are not represented by OPEC, support the move to raise prices. An unwillingness by Russia to agree to output reductions added to other downward pressures on oil prices and caused Saudi Arabia to engage in a price war with Russia that has driven oil prices below $25 per barrel at times, half the estimated $50 per barrel break-even point for most oil producing countries. Rising oil supplies and falling demand are combining to create an estimated surplus of 25 million barrels a day and could soon overwhelm storage capacity and challenge the viability of U.S. shale oil production. In 2019, low energy prices combined with high debt levels reportedly caused U.S. energy producers to reduce their spending on capital equipment, reduced their profits and, in some cases, led to bankruptcies. Reportedly, in late 2019 and early 2020, bond and equity investors, as well as banks, reduced their lending to shale oil producers and other energy producers that typically use oil and gas reserves as collateral.

Disruptions to industrial activity in China reportedly are causing delays in shipments of computers, cell phones, toys, and medical equipment. Factory output in China, the United States, Japan, and South Korea all declined in the first months of 2020. Reduced Chinese agricultural exports, including to Japan, are leading to shortages in some commodities. In addition, numerous auto producers are facing shortages in parts and other supplies that have been sourced in China. Reductions in international trade have also affected ocean freight prices. Some freight companies argue that they could be forced to shutter if prices do not rebound quickly. Disruptions in the movements of goods and people reportedly are causing some companies to reassess how international they want their supply chains to be. According to some estimates, nearly every member of the Fortune 1000 is being affected by disruptions in production in China.

Conclusions

The quickly evolving nature of the COVID-19 crisis creates a number of issues that make it difficult to estimate the full cost to global economic activity. These issues include, but are not limited to

How long will the crisis last? How many workers will be affected both temporarily and permanently? How many countries will be infected and how much economic activity will be reduced? When will the economic effects peak? How much economic activity will be lost as a result of the viral outbreak? What are the most effective monetary and fiscal policies at the national and global level to address the crisis? What temporary and permanent effects will the crisis have on how businesses organize their work forces? Many of the public health measures taken by countries such as Italy, Taiwan, South Korea, Hong Kong, and China have sharply impacted their economies (with plant closures, travel restrictions, and so forth). How are the tradeoffs between public health and the economic impact of policies to contain the spread of the virus being weighed?

Appendix. Table A-1. Select Measures Implemented and Announced by Major Economies in Response to COVID-19

International Economic Cooperation

Initial efforts at coordinating the economic response to the COVID-19 pandemic across countries have been uneven. Governments are divided over the appropriate response and in some cases have acted unilaterally, particularly when closing borders and imposing export restrictions on medical equipment and medicine. An emergency meeting of G-7 (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) finance ministers on March 3, 2020, fell short of the aggressive and concrete coordinated action that investors and economists had been hoping for, and U.S. and European stock markets fell sharply after the meeting. However, on March 16, 2020, the leaders of the G-7 countries held an emergency summit by teleconference to discuss and coordinate their policy responses to the economic fallout from the global spread of COVID-19. In the joint statement released by the G-7 leaders after the emergency teleconference summit, the leaders stressed they are committed to doing "whatever is necessary to ensure a strong global response through closer cooperation and enhanced cooperation of efforts." The countries pledged to coordinate research efforts, increase the availability of medical equipment; mobilize "the full range" of policy instruments, including monetary and fiscal measures, as well as targeted actions to support workers, companies, and sectors most affected by the spread of COVID-19; task the finance ministers to coordinate on a weekly basis, and direct the IMF and the World Bank Group, as well as other international organizations, to support countries worldwide as part of a coordinated global response. G-7 coordination has not been without problems, however, including disagreement among G-7 foreign affairs ministers about how to refer to the virus (coronavirus or the "Wuhan virus") and concerns about collaboration on vaccine research.

The G-20, which has a broader membership of major advanced and emerging-market economies representing 85% of world GDP, was slower to respond to the pandemic. Even though G-20 coordination is widely viewed as critical in the response to the global financial crisis of 2008-2009, several factors may have complicated G-20 coordination in the current context: the Trump Administration's prioritization of an "America First" foreign policy over one committed to multilateralism; the 2020 chair of the G-20, Saudi Arabia, is embroiled in its own domestic political issues and oil price war; and U.S.-China tensions make G-20 consensus more difficult. The G-20 held a summit by teleconference on March 26, 2020, but the resulting communique was criticized for failing to include concrete action items beyond what national governments were already doing. However, G-20 coordination appears to be gaining momentum, most notably with the G-20 agreement on debt relief for low-income countries (see " Looming Debt Crises and Debt Relief Efforts ").

Meanwhile, international organizations including the IMF and multilateral development banks, have tried to forge ahead with economic support given their current resources. Additionally, the Financial Stability Board (FSB), an international body including the United States that monitors the global financial system and makes regulations to ensure stability, released a statement on March 20, 2020, that its members are actively cooperating to maintain financial stability during market stress related to COVID-19. The FSB is encouraging governments to use flexibility within existing international standards to provide continued access to funding for market participants and for businesses and households facing temporary difficulties from COVID-19, while noting that many FSB members have already taken action to release available capital and liquidity buffers.

Looming Debt Crises and Debt Relief Efforts

COVID-19 could trigger a wave of defaults around the world. In Q3 2019âbefore the outbreak of COVID-19âglobal debt levels reached an all-time high of nearly $253 trillion, about 320% of global GDP. About 70% of global debt is held by advanced economies and about 30% is held by emerging markets. Globally, most debt is held by nonfinancial corporations (29%), governments (27%) and financial corporations (24%), followed by households (19%). Debt in emerging markets has nearly doubled since 2010, primarily driven by borrowing from state-owned enterprises.

High debt levels make borrowers vulnerable to shocks that disrupt revenue and inflows of new financing. The disruption in economic activity associated with COVID-19 is a wide-scale exogenous shock that will make it significantly more difficult for many private borrowers (corporations and households) and public borrowers (governments) around the world to repay their debts. COVID-19 has hit the revenue of corporations in a range of industries: factories are ceasing production, brick-and-mortar retail stores and restaurants are closing, commodity prices have plunged (Bloomberg commodity price indexâa basket of oil, metals, and food pricesâhas dropped 27% since the start of the year and is now at its lowest level since 1986), and overseas and in some cases domestic travel is being curtailed.

Households are facing a rapid increase in unemployment and, in many developing countries, a decline in remittances. With fewer resources, corporations and households may default on their debts, absent government intervention. These defaults will result in a decline in bank assets, making it difficult for banks to extend new loans during the crisis or, more severely, creating solvency problems for banks. Meanwhile, many governments are dramatically increasing spending to combat the pandemic, and are likely to face sharp reductions in revenue, putting pressure on public finances and raising the likelihood of sovereign (government) defaults. Debt dynamics are particularly problematic in emerging economies, where debt obligations denominated in foreign currencies (usually U.S. dollars). Many emerging market currencies have depreciated since the outbreak of the pandemic, raising the value of their debts in terms of local currency.

Governments will face difficult choices if there is a widespread wave of defaults. Most governments have signaled a commitment to or already implemented policies to support those economically impacted by the pandemic. These governments face decisions about the type of assistance to provide (loans versus direct payments), the amount of assistance to provide, how to allocate rescue funds, and what conditions if any to attach to funds. Governments have undertaken extraordinary fiscal and monetary measures to combat the crisis. However, developing countries that are constrained by limited financial resources and where health systems could quickly become overloaded are particularly vulnerable.

In terms of defaults by governments (sovereign defaults), emergency assistance is generally provided by the IMF, and sometimes paired with additional rescue funds from other governments on a bilateral basis. The IMF and other potential donor countries will need to consider whether the IMF has adequate resources to respond to the crisis, how to allocate funding if the demand for funding exceeds the amount available, what conditions should be attached to rescue funding, and whether IMF programs should be paired with a restructuring of the government's debt ("burden sharing" with private investors).

International efforts are underway to help the most vulnerable developing countries grapple with debt pressures. In mid-April 2020, the IMF tapped its Catastrophe Containment and Relief Trust (CRRT), funded by donor countries, to provide grants to cover the debt payments of 25 poor and vulnerable countries to the IMF for six months. The IMF hopes that additional donor contributions will allow this debt service relief to be extended for two years. Additionally, the G-20 finance ministers agreed to suspend debt service payments for the world's poorest countries through the end of 2020. The Institute for International Economics, which represents 450 banks, hedge funds, and other global financial funds, also announced that private creditors will join the debt relief effort on a voluntary basis. This debt standstill will free up more than $20 billion for these countries to spend on improving their health systems and fighting the pandemic. Private sector commitments were critical for official creditors, so that developing countries could redirect funds to improving health systems rather than repaying private creditors.