In the early stages of the coronavirus expansion, there has been no consensus on the strategy to be followed to stop it. But as the speed of the contagion has been verified and the number of deaths has increased, the one of “flattening the curve” has been imposed.

Or, in other words, “do whatever it takes” to prevent the spread of the virus: confinement and reduction of production. Whatever it takes in terms of GDP. Thus, it has been prioritized to reduce infections and deaths without taking into account the economic impact. Or, perhaps, precisely because of this: Containing the pandemic as soon as possible is the best way to avoid a lasting economic crisis. Time will tell which strategy is the most successful and will set a precedent for action for the next pandemic.

Flatten the curve

What is clear that we are going to attend the largest economic recession in history. It is still too early to quantify it, and any forecast is subject to the time frame of the health crisis: without the end of the coronavirus, there will be no end of the recession. The consensus speaks of a 20% drop in GDP in annualized terms, such that, if the crisis lasts two quarters, the correction would be 10%. “Simple” calculation very subject, I insist, to many assumptions about which we now have little visibility. But it is possible to say that the economic shock will be the most important ever seen. Even more so than in the Great Depression of the 1930s or in the World Wars.

But when it comes to these recessions, we now have tools. I am referring to monetary policy and fiscal policy which, in these circumstances, are not exhausted. Not much less. The stimuli, via public spending, will be of an intensity never seen before. This may be the big difference compared to the crisis of the 1930s. The speed and forcefulness of the reaction of the economic authorities. Along with that of central banks. Those who have been able (the US or the Bank of England) have cut interest rates to 0.0%.

And all of them have reissued the unconventional measures programs (injection of liquidity and purchase of fixed income assets). These were designed between 2008 and 2009. So it took much longer to conceive, approve and implement them. And in a way because the Great Global Financial Crisis (also called the Great Recession) was much more complex (a financial crisis originating in the center of the system). Now it seems to us that no, that everyone understood it. We fall into the hindsight bias and our memory fails us. But first it was a liquidity crisis in the interbank market (summer 2007), then a solvency problem for some entities, then the systemic effect of Lehman (September 2008), then the economic crisis (first half of 2009), the diabolical loop (Ontiveros), then the risk of rupture of the EMU (2011-2012). That crisis was much more complex than this one! And, furthermore, a part of the countries (and economists) were against the battery of unconventional measures that, sooner or later (in some cases, as in the EMU, too late) were adopted. Now it has been a matter of a few days (between 5 and 15) and although some authorities have committed some miscommunication (Lagarde, March 12 and the Governor of the Bank of Austria, March 18), no one doubts that they will do “everything that is necessary ”, now in the field of the economy, to mitigate the effects of the recession and, above all, to avoid structural damage. The key is that “irreparable ruptures” do not occur in the productive tissue and that it is operational so that the day after (D + 1) the activity can be reactivated in the shortest possible time. For this, it will be key that all that liquidity that the central banks are going to inject reaches companies (and especially SMEs) and families via the banking channel. This is an opportunity for credit institutions to regain their deserved prominence and the support of citizens.

David Cano Martínez
@david_cano_m