Central banks take the plunge as the global economy collapses

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By Geoffrey Smith

GossipMantri.com – World central banks step up efforts to support the global economy as the onset of winter in the northern hemisphere triggers a surge in Covid-19 cases from Russia to Europe and United States.

In the past two weeks, the European Central Bank has almost committed to a major easing of monetary policy, the Federal Reserve has repeatedly warned of the growing threat to the US economy from the spread of the disease , and central UK and Australia. banks have already taken the plunge: the Bank of England has increased its asset purchase program by 150 billion pounds, or 50 billion more than expected, while the Reserve Bank of Australia has announced its all first quantitative easing program and cut its key rate to a new record low of 0.1%.

These measures are a response to a dramatic loss of momentum in the European economy in particular, as infection rates skyrocket and governments rush to reduce unnecessary contact in social and business life. Economists at Dutch bank ABN AMRO (AS 🙂 expect euro area GDP to contract 3.8% in the fourth quarter. The impact on UK GDP is already clear with record job losses in October and a collapse in business investment, as measured by the Bank of England. Pantheon Macroeconomics expects the UK to stagnate at best in the current quarter.

If the United States appears to be dragging its feet, relative to its European counterparts, this is largely for two reasons: First, high-frequency data from the U.S. economy has held up somewhat better, particularly in areas such as the labor market, retail sales and the housing market. The U.S. economy added 638,000 healthy jobs in October, according to data released on Friday. On Tuesday, the National Federation of Independent Business said small business optimism returned to its highest level in October since the outbreak of the pandemic.

Second, the last Fed policy meeting only took place a day after the hotly contested presidential election, and any action by the central bank would inevitably have been seen as a commentary on the political process, which it would like. avoid at all costs.

However, the Fed is clearly concerned with how Covid-19 has come back to life amid popular resistance to restrictive public health measures.

“If the pandemic persists longer than expected – particularly if there are prolonged delays in the production or distribution of an effective vaccine – downward pressure on the U.S. economy could derail the nascent recovery and weigh on financial markets, ”the central bank said in its semi-annual report on financial stability, released on Monday.

“Given the generally high debt level in the non-financial corporate sector, prolonged weakness in profits could trigger financial strains and defaults.”

Fed Chairman Jerome Powell has repeatedly called on the government to take the lead in supporting the economy with tax measures. However, the elections appear to have confirmed the split in Congress which halted a package of tax measures being agreed upon before last week. If this continues to prevent the development of a major support program, the Fed may also feel that it has no choice but to get started.

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