Analysis & Opinions - Belfer Center for Science and International Affairs, Harvard Kennedy School

The Week in Covid-19 and Economic Diplomacy: ‘Surprise! Jobs.'

| June 11, 2020

This week’s 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 jobs report suggested that U.S. employment grew last week, surprising market observers. But risks remain: unemployment is still at record highs, job growth was inequitable, and some fear positive employment data may prompt the government to reign in fiscal stimulus measures too early.
  • The Federal Reserve announced it would keep near-zero interest rates unchanged likely through at least 2022, in a statement following its June meetings.
  • Germany unveiled a fiscal stimulus plan to kick-start economic recovery following the virus, signalling a shift from tight fiscal policy in recent years.
  • The World Bank forecasts emerging market economies to decline for the first time in sixty years as a result of the COVID-19 crisis. Yet at the same time, investors are plowing funds back into developing countries, currencies have stabilized, and sovereign bonds yields are decreasing.


U.S. Developments

The U.S. economy gained 2.5 million jobs in May, according to data released by the Bureau of Labor Statistics, surprising economists who had predicted 7 million jobs would be lost. The unemployment rate fell to 13.3% in May from 14.7% in April. The BLS said it was working to correct a data classification error that understates unemployment, where people who should be classified as unemployed are incorrectly labelled “absent from work.” But the BLS pushed back strongly on allegations of political tampering. Job gains were not equitable, however, with black unemployment rising 0.1% from April. And some analysts cautioned that good news on the employment front might cause the government to prematurely end much-needed stimulus.

  • Jason Furman, Harvard Kennedy School professor and former chair of the Council of Economic Advisers in the Obama administration, and Wilson Powell break down the latest numbers at the Peterson Institute of International Economics, showing that unemployment is still “higher than it looks.” Including workers who have left the labor force or who for classification reasons were not counted as unemployed, they arrive at a “realistic” 17.1% unemployment, the highest in over 70 years.
  • Eric Morath and Amara Omeokwe at the Wall Street Journal review how the virus has put an end to record low black unemployment, which has tripled from 5.8% in February to 16.8% in May. And although the current 13.3% unemployment rate may be unprecedented for the country at large, Morath and Omeokwe note that black unemployment peaked at 16.8% during the 2008 recession, and stood above 10% from 1974 to 1994.
  • Peter Orszag, former director of the Office of Management and Budget and of the Congressional Budget Office during the Obama administration, writes in Bloomberg that more stimulus is warranted despite the positive job numbers. He warns: “It would be foolish to celebrate positive jobs numbers without recognizing how much the colossal stimulus measures have blunted the effects of the economic crisis. It is likewise important to be cautious about what can happen if fiscal support is withdrawn.”
  • Alan Blinder, Princeton economist and former Vice Chairman of the Federal Reserve, offers a proposal on extending the Cares Act beyond July without disincentivizing employment. Letting the $600 weekly benefit expire, he says, is a terrible idea. Instead, Congress should consider repurposing the benefit to pay “back to work” bonuses to compensate for the costs of returning to work and associated health risks.

The Federal Reserve announced at the end of its June meetings on Wednesday that it would keep near-zero interest rates in place, likely until at least the end of 2022. “We’re not even thinking about thinking about raising rates,” Chairman Powell (actually) said in his news conference following the meeting. That leaves the Fed’s policy stance largely unchanged since the central bank launched a sweeping set of policy tools designed to combat the COVID-19 crisis earlier this year. Powell reaffirmed the Fed’s commitment to using those policies “to do whatever we can for as long as it takes.”

  • The Fed’s latest forecast predicts unemployment will decline to 9.3% by the end of the year, and that U.S. GDP will decline by 6.5% this year. On the latest unemployment numbers, Powell commented that it’s possible that millions of Americans “don’t get to go back to their old jobs.”
  • The Fed has also recently been expanding some of its lending facilities. Jeanna Smialek writes in The New York Times that the Fed broadened the Municipal Liquidity Facility by allowing states to designate cities, counties and other governmental entities as eligible for the program. Nick Timiraos of the Wall Street Journal details the changes the Fed made to its Main Street Lending Program, expanding the scope of eligible participants and easing lending terms.
  • Responding to questions about the racial disparity in employment losses, Powell acknowledged that “the downturn has not fallen equally on all Americans.” Although he said the Federal Reserve does not target policy to specific groups, he said the Fed was cognizant of the fact that a tight labor market prior to the crisis was beneficial for those at the lower end of the wage spectrum. “We would really like to get back to that place,” Powell said.


European Developments

Last week Germany announced a 130 billion euro stimulus plan, designed to bring Germany out of the crisis with “a bang” (or a “ka-boom” — the English-language press is divided on the translation). The stimulus would not only reverse years of German policy, which held fast to its “black zero” policy of balancing its budget, but also make it one of the first countries in the European Union to shift to recovery rather than emergency relief policies.

  • “Mirror, mirror, on the wall, who’s the most Keynesian of them all?” quips Martin Sandbu in the Financial Times, noting the reversal of Germany’s notoriously conservative fiscal spending is not as surprising as some observers say. Germany, after all, launched a fiscal stimulus following the 2008 crisis, and reduced its deficit during the years that followed. Where it has fallen short of Keynes, Sandbu argues, is in failing to stimulate investment at home, which has been net negative, despite a high savings rate. The new policy remedies that position to an extent, but Sandbu asks whether this marks a longer-term shift in Germany’s support of public and private investment.
  • Guy Chazan, also in the Financial Times, profiles the German leaders behind the policy shift, including Finance Minister Olaf Scholz and his deputy, Jörg Kukies, who played a role in the agreement reached by France and Germany to support a 500 billion euro European recovery fund raised through common eurozone debt.


Emerging Market Developments

Emerging market economies will decline for the first time in sixty years, according to the World Bank’s recent Global Economic Prospects. And while the virus appears to have abated across the developed world, infections are rising in many emerging markets. 

  • The World Bank forecasts that emerging and developed economies will see negative growth for the first time in at least sixty years, declining by 2.5% this year (compared to a 7% decline in advanced economies). Latin America will be hardest hit, declining 7.2%. The Bank cited key downside risks including “pressure on weak health care systems, loss of trade and tourism, dwindling remittances, subdued capital flows, and tight financial conditions amid mounting debt,” as well as commodity price fluctuations.
  • Enda Curran at Bloomberg reviews recent investment inflows back into Asian economies, and the subsequent currency stabilization. That has given central banks an opportunity to “wait and see” as they craft policy responses tailored to national needs, including interest rate cuts that typically put downward pressure on currencies.
  • Martin Wolf warns in the Financial Times that in developing countries, many economies and billions of people may be entering “the beginning of many lost years.” Developing countries must contend not only with the virus, as infections rise across the developing world, but also with the global economic shock to which they are particularly vulnerable. Absence an effective policy response, the effects of both could hamper the economic outlook for developing nations for years to come.

Given these risks, however, many observers have been perplexed at how near-term financial stress for emerging markets has subsided. Currencies have broadly stabilized and funds are beginning to flow back into emerging markets after record outflows earlier this year.

  • In Africa, the Economist notes that despite IMF and World Bank lending, governments face a $44 billion financing gap. Yet governments have been reluctant to take up the G20’s offer to suspend bilateral debt payments for 73 of the world’s poorest countries: less than half of countries have taken up the offer. A third of Sub-Saharan Africa’s sovereign debt is held by private creditors, and governments may fear downgrades that impact their borrowing ability if they participate in relief programs.
  • Avantika Chilkoti at the Wall Street Journal observes that emerging market bond yields — the rate countries pay to borrow — have dropped sharply, however. Countries with investment-grade ratings, including Panama, Israel and Indonesia, sold bonds in March and April this year. Countries with high-yield ratings, including Egypt and Bahrain, were also able to raise new funds in May.
  • Law professors Mitu Gulati (Duke) and Mark Weidemaier (UNC) take a closer look at the terms investors and countries are agreeing to in recently issued sovereign bonds. Corporate M&A contracts have been sensitive to COVID-19 developments; the authors wonder if investors are insisting upon new COVID-19 protections in sovereign bonds. Instead, they find “nothing, nada, zippo.” Either sovereign bond contracts evolve at a slower pace, they speculate, or “everyone involved is counting on a giant bailout if things go south.”


Odds and Ends

For more information on this publication: Belfer Communications Office
For Academic Citation: Cassetta, John Michael.“The Week in Covid-19 and Economic Diplomacy: ‘Surprise! Jobs.'.” Belfer Center for Science and International Affairs, Harvard Kennedy School, June 11, 2020.

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