France’s Francois Villeroy de Galhau and Italy’s Ignazio Visco were speaking at the Group of 20 meeting of central bankers and finance ministers in Riyadh, where the threat from the outbreak was front and center.
“If we don’t see a rapid V-shaped effect there must be some decision to act in a coordinated way,” Visco told Bloomberg on the sidelines of the G-20. “We must use fiscal policy because monetary policy is already very very accommodative around the world, and it’s uncertain that we can do more on that.”
Villeroy said delegates at the meeting spoke a lot about daily monitoring and contingency plans, even if the central scenario remains for now a V-shaped recovery.
“There was the feeling that if the policy mix needed to be strengthened in the face of coronavirus, it couldn’t be only monetary policy. There is still monetary space but it is more limited than before,” Villeroy told Bloomberg. “It is even true in the U.S., so therefore questions of fiscal space and structural reforms are back in force.”
Trade has been severely disrupted by factory closures in China’s Hubei province, the epicenter of the outbreak, and companies from Apple Inc. in the U.S. to Europe’s largest tiremaker Michelin have warned that profits could suffer.
The blow is all the more harsh as G-20 delegates otherwise had reason to see the world economy turning a corner. Villeroy noted that “nobody seriously fears a recession,” and the U.S. -China trade tensions that dominated previous meetings have declined.
“If there is one concern about the economy at this G-20, it’s coronavirus,” he said.
Visco said the world economy has two quarters to bounce back from the coronavirus hit before policy makers should unleash coordinated fiscal stimulus. Back-of-the-envelop calculations by finance chiefs at the Riyadh meetings suggest the outbreak could knock by 0.1 percentage point off global growth this year, Visco said.
The hit to the Italian economy could be as high as a quarter of a percent, reflecting the economy’s integration into global value chains and its reliance on tourism.
“I’m already worried now but if we don’t see a material improvement by September, I’d be really worried,” Visco said. “You need two quarters to realize and understand.”
Visco lent weight to his argument by warning there’s a risk of a “mini de-globalization” if pessimism and fears about further supply-chain interruptions leave the economy suffering for a protracted period. “This shouldn’t be ignored.”
Visco said central bankers haven’t discussed joining forces to deliver a coordinated monetary-policy response. The ECB’s deposit rate is already at a record-low -0.5%.
“If there’s a need for liquidity assistance, it can be provided through various measures like swaps — of course,” he said. “If you think about interest rates, it’s much more complicated. There are limits which are not explored.”
On climate, Visco said he saw “reasoned considerations” at the meeting in Riyadh that it’s important to pay attention to the risks global warming can pose for financial stability.
“What looked quite new two years ago is now almost a G-20 consensus, so this is a very significant move,” Villeroy said.