Coronavirus threat should push global superpowers to ditch austerity and ramp up fiscal stimulus

As the coronavirus takes its toll on a global economy already battered by the US-China trade war, central bank monetary policy easing will not do the trick

In Europe, where interest rates are already negative, only massive public spending will prevent Germany, France and Italy from heading into recession

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Britain’s Chancellor of the Exchequer Rishi Sunak outside Downing Street in London on February 14. He is under pressure to increase public spending in his budget to be delivered on March 11. Photo: Reuters

Published: 8:00pm, 2 Mar 2020Updated: 10:25pm, 2 Mar 2020

It’s all suddenly starting to look a lot more ominous. The coronavirus crisis is growing in magnitude, markets are sliding and the impact on the global economy is growing by the day. The crash in China’s manufacturing activity index to an all-time low of 35.7 in February from 50 in January is a wake-up call to governments around the world that, without stronger intervention, economic conditions will only worsen.

China’s economy is a weather vane for the rest of the world and a warning that it’s time for governments around the globe to go on the offensive and ramp up spending to cool the rising panic. It is pointless to expect central banks to take the strain with looser monetary policy; global superpowers need to lead by example and pump up the world economy with a lot more fiscal stimulus.

The recovery from the 2008 financial crash proved the global economy can be resilient and will bounce back, but world policymakers need to spend their way to faster recovery first.

It’s time to dump budget austerity in favour of global fiscal reflation. World stock markets have seen upwards of US$7 trillion wiped off share values over the past few weeks and the major industrial nations will need to stump up several trillion dollars of extra stimulus in the months ahead to make up for the hit to wealth expectations and economic confidence.

Without a firm stand, markets will get the wrong message, investors will continue to dive into safe haven bolt-holes and risk asset markets like equities will go into deeper shock. If governments fail to react quickly enough, a global recession will follow. There is no room for complacency and hoping that the virus will peter out soon; global policymakers must get their skates on with special measures to beat the crisis.

China and the United States both appear to be heading in the right direction, but more needs to be done. Beijing has put in place special measures to counter headwinds to growth, with additional government spending and further cuts to the cost of borrowing for consumers and business.

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