This Week in COVID-19 and Economic Diplomacy: ‘Pandemic’s Impact Far From Complete’

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

• Fed Chair Jerome Powell states the need for more fiscal stimulus with September’s optimistic economic forecast assuming additional fiscal support. 
   
• Spain announces plans to create 800,00 jobs over the next three years using €72 billion from the EU recovery fund. 
   
• Foreign investor demand for Chinese assets raises the prospects of the renminbi becoming a currency reserve. 

U.S. Developments

• The Fed’s rosy September economic forecast depended on additional fiscal support. The Fed predicted that unemployment would reach 7.6% by the end of the year, down from the forecast of 9.3% in June. However, if there is significantly smaller or no stimulus, “the pace of the recovery could be slower than anticipated.” Earlier this week, President Trump announced that a stimulus plan would not be approved until after the November election.
   
• Fed Chair Jerome Powell stated the need for more fiscal stimulus as the pandemic’s economic impact is “far from complete.” Powell stated that providing too fiscal stimulus was more dangerous than too much in his most explicit statement appealing for fiscal stimulus. He explained that “Even if policy actions ultimately prove to be greater than needed, they will not go to waste.” The New York Times provides analysis on the shape of the economic crisis.
   
• Initial jobless claims filed reached 840,000, higher than the 820,000 new applications predicted by economists. Applications for aid which helps workers not eligible for traditional benefits were 464,000 bringing the total number of Americans seeking assistance for the first time to 1.3 million. Though the numbers are a slight deep from the previous week’s figures, these numbers underscore the economy’s sluggish recovery.

European Developments

• Euro appreciation poses a risk to growth and inflation making the case for keeping a “free hand” in how the ECB responds to the pandemic. The pace, more so than the actual exchange rate level, is causing concern. The minutes from the latest meeting show that the ECB is more concerned with inflation than previously thought with the ECB forecasting an average increase of 0.3% this year to 1% next year. 
   
• Spain announced its plan of creating more than 800,000 jobs over the next three years through the EU’s recovery fund. Madrid will receive €72 billion between 2021 and 2023, 37% would go to green investment and 33% would go to digital transformation. Spain hopes to obtain €140 billion total in grants and loans as its economy is one of the most affected by the pandemic in Europe. GDP is expected to shrink by 11.2% and the Bank of Spain warned unemployment could hit 20% by 2022.
   
• Italy’s industrial production in August outperformed other major eurozone economies, nearly reaching last year’s level. Output increased by 7.7%, much stronger than the 1.3% jump forecast by economists polled by Reuters. August marks the fourth successive month in which output grew by more than 7% and leaves Italian output only 0.3% down from last year. For comparison, Germany’s August output was still 10% below last year’s level; France and the UK was down by more than 6%. Italy’s performance was driven by durable consumer goods and all major sectors’ production increased.  

Emerging Markets

• World Bank chief economist Carmen Reinhart tells developing countries to take on new debt to combat the economic impact of the pandemic. Reinhart argues that developing economies have a lower tolerance for debt compared to advanced economies which will only further exacerbate the impact of pandemic. How to address the rise in government indebtedness will undoubtedly be discussed at next week’s joint annual World Bank and IMF Meetings. The G20 is expected to soon announce extending its moratorium on official bilateral loan repayments from developing countries.
   
• Foreign demand for Chinese assets will boost efforts to develop a more global role for the renminbi. A 10-year Chinese government debt yields 2.7% compared to U.S. debt which yields 0.8%. The increase in onshore Chinese holdings raises the prospects of the renminbi becoming a reserve currency. However, “the rise of the renminbi as a reserve currency is not a sprint, it’s a marathon” and is hindered by the lack of its full convertibility. Nearly 62% of global reserves are held in dollars.

Odds and Ends

• Adam Taylor writes in the Washington Post on how democracies are backsliding amid the pandemic. A report by Freedom House found that democracy and human rights have worsened in at least 80 of 192 nations surveyed.
   
• Louise Sheiner and Kadija Yilla write a primer for Brookings on federal debt policy in an era of low interest rates. 
   
• Mariana Mazzucato writes in Foreign Affairs on what capitalism should look like after the pandemic. Evelyn L. Forget writes that the idea of the basic income has become increasingly popular during the pandemic. 
   
• The Financial Times interviews Kristalina Georgievea, managing director of the IMF, on pandemic spending and how austerity causes more economic harm than good.