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  • KPB & Co Research

Synopsis

As the Novel Corona virus continues to spread across the world, increasingly larger groups of people have had to stay home to slow the spread of the disease. With more people staying home, many industries have either grind to a halt or slowed down immensely. This continues to create policy challenges for both central banks and central governments. The pace and extent of the slowdown in economic activity has caused the central bank to revisit supportive policy measures multiple times, with a view to expand the level of counter cyclical measures to match the challenge. During this week alone there were several updates to policy in response to in coming data, which we shall discuss.

New Policy Initiatives This Week

In response to deteriorating economic fundamentals, the range of fiscal and monetary policy initiatives are:

  1. Preliminary data indicate that over a million people in Canada filed unemployment insurance claims, which is a significant increase given that it could represent a 5 percentage point increase in the unemployment rate. Some reports indicate that such a rise implies that the unemployment rate in Canada will probably double to 8% by the time the final numbers are announced. Other business data show that business confidence have been deteriorating also, with confidence declining to the lowest March number seen since the 2008/2009 crisis.
  2. On Wednesday the Federal Government of Canada expanded the stimulus program to fight COVID-19 by approximately C$25Bn (almost double the original fiscal commitment). The expanded program will cover furloughed workers who are temporarily out of a job but still remain with their current employers. The new stimulus also provides expanded benefits for small businesses, possibly subsidizing 75% of select small businesses' wage bills for 3 months.
  3. The number of people filing for unemployment benefits in the USA surged to a record high of 3.3 million. This kind of surge is the highest recorded since October 1982 when the country had 695,000 claims.
  4. The size of the US's fiscal stimulus package grew to 2.0 trillion dollars by mid-week after starting out at US 1.0 trillion in the previous week. The stimulus package received senate approval Thursday night and Donald Trump signed the Bill into law on Friday evening, after getting approval from the House the same day.
  5. On Thursday the Bank of England held firm on its base rate, keeping the rate at approximately 0.1%. In the prior week, the Bank slashed its key monetary policy rates from 0.75% to 0.25%. The Bank also agreed to continue quantitative easing by purchasing £200Bn of UK government bonds, and non-financial investment grade corporate bonds, bringing the total holdings to £645Bn.
  6. British Chancellor of the Exchequer - Rishi Sunak - unveiled another round of funds for the self employed. The British self employed will also be paid 80% of average monthly profits over the last 3 years. This type of support brings the level of support for the self-employed to just about that offered to workers who have been put into furlough by companies who have shuttered. According to the Chancellor, the scheme would be open to those with trading profits of up to £50k which covers just about 90% of the population.
  7. On Friday the Bank of Canada (BoC) slashed rates to 0.25% and announced new quantitative easing measures to purchase C$5Bn Government of Canada bonds per week. The more aggressive monetary measures came against the backdrop of weaker than anticipated economic data.  

Whats next ...

Going forward, we expect to ​get more information on how government programs will be executed over the coming days and  months. Judging by the extent of the job losses thus far, it is clear to us that the speed at which these funds will be disbursed are critical to stave off a major economic recession. Some pundits are saying that the economy may re-open by the second week of April which would be good, but seems a bit overly optimistic. In addition, many of the programs outlined are slated to begin disbursing money at the start of the fiscal year on April 1, with some trickling in about May and June. 


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