This Week in COVID-19 and Economic Diplomacy: ‘A Half-Finished Bridge'

Our weekly COVID-19 and Economic Diplomacy tracker looks at policies that impact the coordination of international governments and central banks, ongoing commentary and analysis, and asks what these turbulent times mean for economic diplomacy. 

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The Highlights

• The WHO established COVAX, a facility to accelerate and equitably distribute vaccines as the organization warns against vaccine nationalism. 
   
• As the U.S. economy has yet to recover 60% of jobs lost and a potential $70 billion cut in monthly disposable income, analysts are concerned that the lack of a Congressional deal and fiscal policy support will exacerbate the economic fallout in the U.S.
   
• Fed Chair Jerome Powell announced that the Fed will focus on keeping unemployment low and allow inflation to run higher than the current 2% target. 
   
• Though the UK exceeded £2 trillion in public debt, its GDP is expected to increase 14.3% in the third quarter. However, weaknesses in its labor market threaten mass unemployment exceeding the predicted 12% unemployment rate.
   
• Latin America’s GDP is expected to drop 8.2% this year with a 3.5% growth. It continues to face challenges to its economic recovery as chronic weaknesses pre-pandemic have only worsened the region’s economic downturn.

Global Developments

• The WHO warned against “vaccine nationalism” and, in partnership with other international organizations, have set up the COVID-19 Vaccines Global Access (COVAX) Facility which will accelerate and equitably distribute vaccines. Through COVAX, countries will invest in 12 different vaccines and ensure early access when a vaccine is available. The animating idea behind this effort is participating in COVAX is an insurance policy in case a country is investing in the wrong vaccine. It is unclear, however, how many rich countries will join.   

U.S. Developments

• The Fed’s annual Jackson Hole conference begins today with Fed chair Jerome Powell announcing that the Fed will focus on keeping unemployment low and allow inflation to overshoot the 2 percent target. In his remarks, Fed Chair Powell stated that “this change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.” The Fed will move to targeting average inflation of 2%, allowing it to run higher at times to compensate for the persistently low inflation that has plagued the U.S. and other economies.  The policy changes come after a two-year review and were widely expected. A copy of Mr. Powell’s remarks can be found here. 
   
• As key economic indicators of hiring, shopping, and investment stall or decline, the lack of a Congressional stimulus package strikes fear of a protracted recovery and a new wave of COVID-19 infections. Congress failed to reach a deal before August recess and analysts are increasingly accounting for the possibility that Congress will not strike a deal by the November election. The economy has yet to recover 60% of jobs lost and the lapse of the $600 unemployment benefit could cut monthly disposable income by $70 billion. This in turn will cut consumer spending which accounts for 70% of the economy. Megan Greene, a senior fellow at Harvard Kennedy School, stated that without a new government package, “we could go back into a recession. We built half a bridge, and we didn’t bother to finish it.”
   
• Minutes from the Fed’s July meeting show that additional fiscal policy support was a major point of discussion. Against the backdrop of a quickly approaching expiration date on elements of the economic relief package, the Fed emphasized the uncertainty surrounding a new Congressional deal and the need for fiscal policy to support business activity. The minutes also noted that, “with lower-wage and service sector jobs disproportionately held by African-Americans, Hispanics, and women, these portions of the population were bearing a disproportionate share of the economic hardship caused by the pandemic.”

European Developments

• The German economy continues to show signs of improvement, with business sentiment increasing for the fourth consecutive month and finding that the economic impact of the pandemic was less severe than previously estimated. The overall score for Germany’s business climate rose from 90.4 to 92.6 in July, according to a survey by the Ifo Institute. The national statistics office also found that the economic contraction in the second quarter was slightly less severe than initially thought. The economy shrank 9.7% quarter on quarter compared to the initially estimated 10.1%. However, a recent resurgence in cases could cause the recovery to stall. The government is expected to prolong the main measures aimed to protect workers and companies with lawmakers meeting to discuss extending the Kurzarbeit furlough scheme from 12 to 24 months. 
   
• The UK has exceeded £2 trillion in public debt for the first time and is borrowing at its highest ever peacetime level. Public debt is now higher than the annual value of goods and services produced in the UK. The rate of monthly borrowing is lower than expected, according to the Office of Budget Responsibility, with consumer spending supporting some tax revenues. 
   
• The UK is set to experience a record-breaking economic recovery in the third quarter as consumer spending rebounded alongside the planned reopening of schools. A new average of forecasts by City of London economists suggests that GDP is set to rise 14.3% in the third quarter. Total consumer spending, including leisure, during the first two weeks of August exceeded the same period last year, marking the first time spending has grown since the lockdown. The predicted jump in GDP growth will move the UK from the bottom of the G7 performance table in the second quarter after recording the sharpest fall in GDP of any G7 nation, to the third position.However, analysts are unsure of the future trajectory of the economy given the winding down of the furlough scheme, potential spread of COVID-19, and whether consumers rein in spending. Samuel Tombs, an economist at Pantheon Macroeconomics stated that “the economy’s high reliance on consumer services and the impending withdrawal of government support for the labor market suggests that the level of GDP will track a lower path than in most other economies going forwards.”
   
• The UK faces mass unemployment as its furlough scheme ends in October with companies starting to contribute to the cost of furloughed staff this month.The Bank of England expects unemployment to peak at 7.5%; the Office for Budget Responsibility has predicted a 12% peak followed by a relatively rapid fall. However, given the weaknesses in the British labor market, those numbers are likely modest according to the Economist. 
   
• The European Central Bank warns that the eurozone is likely to suffer a sharp increase in unemployment this fall despite signs of economic recovery. In minutes released from the July meeting, ECB chief economist Philip Lane stated that “surveys suggested that employment was lagging output, with actual and expected declines in employment and income.” The unemployment rate in Europe has remained relatively stable throughout the pandemic due largely in part to government-subsidized furlough schemes. However, signs are emerging that the economic fallout is being felt in the labor market with the eurozone experiencing a 2.8% drop in employment equalling 4.5 million people out of work and governments are looking to ease elements of their pandemic response measures.

Emerging Markets

• Chronic weaknesses in Latin America will keep the region as the worst performer in the developing world. The region has been the global epicenter of the pandemic since June, accounting for 40% of the world’s new COVID-19 deaths despite only having 8% of the world’s population. Lockdowns and travel restrictions, trade reduction, foreign investment outflows, and lower remittances dealt a “triple sudden stop” in the economy. GDP across the region is expected to decrease 8.2% this year and will grow only 3.5%.  According to Eric Parrado, chief economist at the Inter-American Development Bank, “Latin American and the Caribbean in 2020 is like a plane flying with two broken engines. The first broken engine relates to all the preexisting economic problems - social crisis in several countries, low productivity and growth and political polarizations - and the second is related to the pandemic.” 

Odds & Ends

• Janet Yellen and Jared Bernstein pen an oped in the New York Times praising the Fed’s response to the pandemic and urging Congress to step up to address the ongoing economic crisis.
   
• The New York Times interviewed Kristalina Georgieva, managing director of the IMF, on the IMF’s role during the pandemic and the “economics of gender equality.”
   
• Jacob Leibenluft writes in Foreign Affairs on how weak labor protections worsened the COVID-19 pandemic in the U.S.
   
• Tracey Hadden Loh, Annelies Goger, and Sifan Liu write for Brookings providing a framework for how to help the hospitality sector, which is overrepresented by Black, Latino or Hispanic, female workers and youth and workers with less education. 
   
• Stephen Roll and Michal Grinstein-Weiss authored a Brookings paper on whether CARES Act benefits actually reached vulnerable Americans. Half of those seeking unemployment had not received their benefit or were unable to apply; 44% of surveyed households were still waiting to receive their Economic Impact Payment in late April through mid-May. Connor Raso explores the Trump administration’s emergency rulemaking and its efficacy in addressing the crisis.