Unlike the GFC and the great depression the corona crisis originated in the real economy and was totally unanticipated. The initial absence of vaccines against the COVID-19 virus and its speedy contagiousness prompted medical and political authorities to curtail mobility by imposing lockdowns, quarantines, social distancing and an almost complete standstill of international air travel. By forcing large portions of the work force into segregation and closing down businesses this inevitable policy reaction transformed the impact of the virus from a pure medical emergency into a major real negative supply shock.
The appearance of vaccines raised hopes that the pandemic would be quickly contained. Unfortunately, as of March 2021 the slowness of the immunization process along with the appearance of new variants casts serious doubts on such an optimistic scenario and still forces governments to alternate between less and more stringent sanitary policies.
Reduction in mobility due to restrictions along with individually motivated measures against the pandemic led to a substantial shut down of the economy, reduced production, layoffs, income losses, disruption of supply chains, and elevated personal and aggregate uncertainty. Those effects were amplified by the universality of the medical cum economic crisis and the associated reduction, during 2020, in world trade. The actual and expected GDP shrinkages quickly spilled over to financial markets leading to credit restrictions and capital outflows from developing markets. Sectors relying on social interactions such as travel, entertainment, and tourism took a particularly heavy toll. In parallel international demand for producers of medical supplies soared. The drastic reduction in air and car travel along with production stoppages led, during 2020, to the collapse of the price of crude oil creating serious problems for government finances in some oil producing countries like Russia and Saudi Arabia. But during the first quarter of 2021 the price of oil as well as world trade partially recovered.
Table 1 shows actual rates of growth by major country groups and selected countries for 2019 and 2020. Except for China, all countries in the table have experienced negative rates of growth in 2020 reflecting the global reach of the virus and its economic ramifications. Rates of growth are more negative in advanced economies than in emerging markets and developing economies. Within advanced economies there are substantial differences in the adverse growth effects on GDP ranging from a minimum of − 2.5 for other advanced economies to a maximum of − 11.1 for Spain.
Although not uniform the response of fiscal and monetary policies over the world has been swift and unprecedented in size. Particularly striking is the over 2.2 trillion $ CARES act that was passed at the end of March 2020 in the USA. Unprecedented in size and scope, the legislation was the largest-ever economic stimulus package in US history, amounting to 10% of total US gross domestic product. The bill was much larger than the $831 billion stimulus act passed in 2009 as part of the response to the GFC. The bill provides health care funds, relief to business and organizations in the form of loans, tax credit, tax deferrals and deductions, relief to individuals in various forms such as tax rebates, unemployment benefits, student grants and loans as well as help to defense contractors. At the beginning of March 2021 a 1.9 trillion $ Covid Relief Bill was signed into law by President Beiden. Although not as large as in developed economies unusually high fiscal expansions also took place in emerging markets and low-income developing countries. Detailed country information on fiscal responses to the Covid19 crisis appears in the IMF Data Base of Fiscal Policy Responses to Covid19 (2021).
The worldwide fiscal expansions led to unusually large increases in Debt/GDP ratios. However, both the initial levels and the increases in 2020 were not distributed uniformly across country groups. In 2019, at the eve of the crisis, the average debt/GDP ratio was over 100% in advanced economies, about 50% in emerging market and middle-income economies and less than 25% in low-income developing countries. By mid-2020 the IMF estimated that this ratio will increase by about 15% in the first two groups and by less than half of that in low-income developing countries during 2020.
The initial differences in levels largely reflect the differences in access to capital markets with advanced economies having the easiest access, the low-income having the poorer, with emerging markets in between. Since they have poor credit ratings, interest on the debt of low-income countries is relatively high and their debt is more difficult to place. Although their need for fiscal expansions is no smaller than that of other countries, low-income countries are limited by their fiscal capacities resulting in smaller increases in debt/GDP ratios during 2020.
Figure 1 displays a map of the worldwide distribution of debt/GDP ratios as of October 2020. The map shows that in major advanced economies such as the USA, Canada, the UK, Japan, France, Italy and Spain the debt/GDP ratio exceeds 100%, and in India, South Africa and Egypt it is between 75 and 100%. This ratio is between 50 and 75% in China, Australia and several European countries, between 25 and 50% in Chile, Norway, Saudi Arabia and in some African and Asian countries. Russia’s Debt/GDP ratio is less than 25%.
In parallel to fiscal measures the CBs of many economies have stepped up open market purchases raising their assets to previously unseen levels. This process was particularly dramatic in advanced economies whose CBs accelerated the use of this instrument and extended the scope of assets purchased.
Figure 2 illustrates the gigantic increases in the assets of the Fed, the ECB and the Bank of Japan, during 2020. The Fed injected huge amounts of liquidity by extending its open operations beyond government debt to include various corporate bonds including bonds with rankings below investment grades as well as stocks. Those operations raised total assets of the Fed from around 4 trillion $ at the beginning of 2020 to 7.4 trillion $ at the beginning of 2021. Similar policies by the ECB raised its assets from over 5 trillion $ to 8.6 trillion over the same period. In parallel the assets of the Bank of Japan increased from over 5.0 trillion to 6.8 trillion. Although not as dramatic the assets of the Peoples Bank of China increased by roughly a trillion $.
Since the introduction of large scale asset purchases during the GFC CBs assets have generally been trending upward. But even against this background the acceleration in the trend during 2020 is a notable outlier.