March 2, 2020 / 7:19 PM / a month ago

Breakingviews - Virus fight depends on practical economic measures

Carabinieri officers stand guard outside the town of Castiglione D'Adda, which has been closed by the Italian government due to a coronavirus outbreak, Italy, February 23, 2020.

MILAN (Reuters Breakingviews) - The economic fight against the coronavirus epidemic depends on practical measures. Stock markets briefly rallied on Monday morning after the U.S. Federal Reserve and Bank of Japan hinted at looser monetary policy in response to the disease, which has now killed around 3,000 people worldwide. Investors might be better off studying Italy – the European country worst affected by the outbreak – which is spending 4.5 billion euros to support its economy. Tax breaks and other relief measures designed to keep companies alive could be critical to ensuring a swift rebound.

The health crisis that emerged in the Chinese city of Wuhan risks producing the worst economic downturn since the global financial crisis. The Organisation for Economic Co-operation and Development on Monday lowered its forecast for global growth this year to 2.4%, from 2.9% previously. The club for rich countries did not rule out a recession in the euro area or Japan.

Monetary authorities don’t have much room to respond, though. Years of ultra-loose monetary policy mean central bank balance sheets are bloated and interest rates are at or close to record lows. Besides, lower borrowing costs may do little to boost demand when companies and tourists are cancelling travel and some towns are locked down. Governments will need more targeted measures to soften the economic blow.

That is why Italian Finance Minister Roberto Gualtieri is planning to allow companies and families in the worst-hit towns to skip tax payments and certain bills. Companies whose revenue contracts by more than 25% in the first quarter, compared with previous years, will receive tax relief. The state will also pay the salaries of workers that must be temporarily laid off because of a sharp drop in demand. The idea is to ensure otherwise sound companies do not fail because of a severe but potentially temporary crisis.

If the crisis lasts for four weeks Italy will only lose about 0.2% of its GDP this year, say Intesa Sanpaolo analysts. That is pretty much equivalent to the government stimulus package. If the outbreak persists, however, stronger measures will be needed. For example, Chinese regulators have enabled banks to make cheap loans to small companies. Hong Kong authorities have handed cash to residents. The message is clear: combating the economic effects of the virus will require detailed measures.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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