The guest commentary below was written by Daniel LacalleThis paper was published in the Thomson Reuters Journal of Business Accounting and Finance Perspectives in June 2020.

Will They Work? | Monetary and Fiscal Policies in the COVID-19 Crisis - 02.26.2020 black swan cartoon  1


The spread and mortality rate of the COVID-19 virus has created enormous strains on global healthcare systems and driven governments to take extreme measures to contain the virus, including the lock down most citizens and shutting down most economic sectors.

Due to these unique challenges and coming from an economy that was weak already in 2018 and 2019, the world faces a global crisis of unprecedented impact and high uncertainty about the recovery process.

In this paper we analyze how the world economy is addressing the COVID-19 pandemic. We start with the situation of the main economic regions at the end of last year to understand the tools available to fight against what could be the worst crisis since World War II, according to the IMF[1].

Also, we review the estimated economic impact of COVID-19, as well as the expected recovery and its time frame. Additionally, we reflect on the fiscal and monetary measures adopted by different countries, especially G7 economies, to tackle the crisis.

Finally, we discuss the optimal policies to overcome the situation and advance towards economic recovery and stabilization of public finances.

This crisis is a supply shock added to a forced shutdown of the economy. As such, traditional tools to boost credit demand and usual demand-side policies alone are likely to generate little positive effect, as any aggregate demand that may be incentivized will not likely be followed by aggregate supply. A combination of Demand-side and Supply-side measures may prove to be more effective to boost the recovery after the pandemic.


The world may face the deepest economic decline since World War II due to the impact of COVID-19 and the shutdown of the economy.

According to the “Our World In Data” coronavirus database, at the end of April 2020 there were 16.1 confirmed deaths per million citizens in the world [2].

It is useful to look at our history to put in perspective this pandemic. According to Golier et al, the COVID-19 crisis has no equivalent in modern history, neither in its intensity nor in its treatment. The Spanish flu killed between 50 and 100 million people between 1918 and 1920, but the conditions at the time did not lead to a containment strategy at the state level.

Asian influenza (H2N2) is estimated to have killed 2 million people between 1956 and 1958, in a context where the international surveillance network was still poorly developed. COVID-19 appears to have a spread rate and mortality rate much higher than that of influenza.

In the ‘laissez-faire’ policy invoked at one time in the UK and the Netherlands, for example, some epidemiologists referred to a scenario involving contamination of 70% of the population and a mortality rate of 2% among those contaminated, implying a death rate of 1.4% of the population. For France, this would result in an excess mortality of almost 1 million people. (Gollier, C., Straub S., 2020)

No one doubts about the importance of COVID-19 as the main driver of the crisis, but we cannot ignore either that the global economy was showing important signals of weakness in 2018 and 2019, as global debt reached a record level amidst subdued levels of output growth and gross capital formation.

In February, the consensus between large investment banks and supranational entities was that there would be a one-time hit on GDP in the first quarter from the coronavirus impact, followed by a stronger, V-shaped recovery [3]. The International Monetary Fund (IMF) expected a modest correction of global GDP of 0.1%, and the largest cut on estimates for 2020 growth was 0.4% [4] (World Economic Outlook. January 2020. IMF)

In April 2020, global growth revisions included a slash of estimates for the first and second quarters and a very modest recovery in the third and fourth. JP Morgan expected the eurozone to enter into a deep recession in the first two quarters of 2020,  followed by a very poor recovery that would still leave the full-year 2020 estimates in deep contraction and complete output recovery would not happen until 2022 [5]. The International Monetary Fund estimates that the global economy would contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis [6]. This, unfortunately, looks like just the beginning of a downgrade cycle that adds to an already slowing economy in 2019 and estimates for a rapid recovery based on a strong response from policymakers may prove to be optimistic, as we will explain later.

The decision to shut down air travel and close all non-essential businesses is now a reality in major global economies.

Depending on the effectiveness of containment measures, as well as fiscal and monetary policies all over the world, deaths caused by COVID-19 during 2020 can reach more than 15 million people globally and economic impact could range between -0.2 percentage points and -8.4 percentage points (p.p.) in the Eurozone, -0.1 and -8.4 in the United States of America, and -0.4 p.p. and -6.2 p.p. in China, respectively (Warwick McKibbin. W. et al. 2020).

Currently there is no certainty about how to return to normal, and that is one of the key points to reach a clear measure the final impact of COVID-19 on the global economy.

Studies have demonstrated that without containment measures, “the COVID-19 cases would be 64.81% higher in the 347 Chinese cities outside Hubei province, and 52.64% higher in the 16 non-Wuhan cities inside Hubei” (Fang, H. et al. 2020), and we also find evidence that shows the importance of communicating the expectations about the duration of social isolation measures to maximize the public’s intention to comply (Briscese, G. et al, April 2020).

That is why both politicians and scientists must find the way to balance public health and preservation of the business fabric to ensure a solid recovery.

Markets have rapidly repriced given the deterioration in the outlook. Indeed, the sell-off is not remarkable in its magnitude but it is in terms of speed. Market returns in the US fell 25% between 17 Jan and 3 Apr 2020, and this was not the worst impact. In countries such as Germany, the United Kingdom or Italy, the slump in equity markets reached -30% (JP Morgan. Markets Insights. 3 April 2020). Global stock markets lost $16 trillion in less than a month, according to CBS News [7].

The concerns about financial markets have triggered important defense actions, such as an increase in cash reserves from institutional investors, margin calls that force highly leveraged financial firms (such as real estate investment funds) to sell liquid assets, and significant volatility in government bond markets that slide towards safe-haven assets (Martin, F.M, Federal Reserve of Saint Louis), which could be a reflection of the poor market sentiment regarding the medium term.

This is an important factor because the capital loss in markets added to the forced shutdown may cause significant challenges in the following years, as global businesses will focus their attention on repairing balance sheets.

We also see some defense movements in other markets, such as an increase in cash reserves from institutional investors, margin calls that force highly leveraged financial firms (such as real estate investment funds) to sell liquid assets, and significant ups and downs in government bond markets that slide towards safe-haven assets (Martin, F.M, Federal Reserve of Saint Louis), which could be a reflection of the poor market sentiment regarding the medium term.



This is a Hedgeye Guest Contributor note by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial MarketsThe Energy World Is Flat and the most recent Escape from the Central Bank Trap. This piece does not necessarily reflect the opinions of Hedgeye.

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1 International Monetary Fund, World Economic Outlook, April 2020: Chapter 1. April 2020. Retrieved from /Publications/WEO/Issues/2020/04/14/weo-april-2020.
2. Max Roser, Hannah Ritchie and Esteban Ortiz-Ospina. Coronavirus Disease (COVID-19)—Statistics and Research. Retrieved from
3. Bank of America fund managers’ poll of growth estimates in February 2020 as reported by Bloomberg. Source: https://www.bloomb
4. International Monetry Fund. World Economic Outlook, Tentative Stabilization, Sluggish Recovery. Retrieved from https://www.imf. org/en/Publications/WEO/Issues/2020/01/20/weo-update-january2020.
5. J.P. Morgan growth estimates retrieved from CNBC
6. IMF. World Economic Outlook, April 2020: Chapter 1, April 2020
7. Retrieved from 3-12/