World Economic Update

MALLABY: So this is Sebastian Mallaby from the Council on Foreign Relations. Last time I moderated the World Economic Update back in January things felt a little bit different. I was on the stage in New York. I believe Lewis Alexander, whom I’ll introduce in a minute, was also there with me. We did mention coronavirus, but I can’t claim that we really dwelt on it. At the time, I think Lewis’ Nomura had a forecast for global growth of 3.3 percent for this year.

Now here we are in the penultimate day of March. I’m not in New York. I’m locked down in London. Lew (sp) is dialing in, I presume, from his home in New York. We also have on the line Isabelle Mateos y Lago of BlackRock calling in from London and Matthew Goodman of the Center for Strategic and International Studies calling in from Washington, D.C.

And in the meantime, the world has changed so much since January that that number, forecast for global growth, has gone from 3.3 percent positive to a base case of negative 4 percent. So that’s a swing of more than 7 percentage points. And that negative 4 percent projection for 2020 is a whole lot worse than the negative 1.7 percent recorded after the global financial crisis in 2009, suggesting just how bad the outlook has, indeed, become.

So I thought I’d get this call started by doing a quick tour of the main hubs of the world economy, turning first to Matt Goodman to help us understand what’s going on in East Asia. And then I’ll to Isabelle for Europe and Lew (sp) for the U.S. So starting with Matt on East Asia, what do you see as the main things to watch in terms of how things develop next? And give us a sense of how acute the downturn as a result of coronavirus has been thus far.

GOODMAN: Well, thank you, Sebastian. It’s, I think, not an exaggeration to say that it’s been, you know, a catastrophic first quarter in East Asia writ large, if you look at the big economies. China, Japan, Korea, and then, you know, Singapore, others have all been hit very hard by this. You know, lots of January-February data now in on industrial production, on retail sales, on property sales. All down by, you know, significant double-digit numbers. So this is, you know, going to be a very bad quarter. Some countries in the region were already in trouble. Japan had had a very bad fourth quarter of last year because of their consumption tax hike and other factors. And so this is—this is really hitting the region hard. And of course, it’s where the virus started.

And that’s an important point that I always try to make first. This is a—we’re an economics group, but this is a health crisis first and foremost. And until the health situation is stable and more certain, I think we’re going to have economic ramifications, you know, in East Asia and in the rest of the world. And so I think that’s the focus that one really needs to put on this. And, you know, in that regard there are some positive things, as everyone I’m sure has been following.

You know, the new cases in China seem to be down to, you know, virtually nil except returning people, and that is a concern, but at least if you believe the numbers. And that’s a question about all these countries but especially China. And you have relatively good numbers in the other major economies in East Asia, except that you’re now starting to see an uptick in places like Japan, which recorded another few score each day this past weekend. And that was up pretty significantly from where they were. So it does feel as though we’re not out of the woods yet on the health crisis. And again, until that gets solved this whole problem is not going to be resolved. And that’s what makes this very different from 2008-2009, which I assume you want to explore a little bit.

MALLABY: Yeah. Two things on China, Matt. One is, you know, you raised a question about the authenticity of the numbers on new infections. Quickly, is it possible that these are deliberately played down in order to encourage Chinese workers to go back to work and Chinese consumers to spend?

GOODMAN: Well, there is that—there is that concern. And, you know, as you all know, for some time there have been questions about Chinese statistics on various things, to sort of make—including, you know, the basic GDP numbers—to make the conditions appear to be perhaps healthier or, in some cases, they might have downplayed GDP growth back in the day. But so there’s—you know, there’s a history of this. And I think there’s reason to believe in this case the authorities in Beijing do want to try to get a sense that things are returning to normal and get confidence back. It does appear, you know, that production—you know, that a lot of bigger companies are standing up again their production, or at least their capacity.

Their maybe people are still lagging to some extent, but at least the production capabilities. And, you know, you do have the question particular in the services sector, I think, where—you know, where there’s more face-to-face contact kind of inherent in this and it depends more on consumer confidence whether people are going to actually come back to restaurants and entertainment venues and so forth. And I think there’s where it’s, I think, still pretty dubious that there’s been a substantial bounce back yet and the authorities maybe are exaggerating those numbers to make people feel a little better about this than is quite warranted yet.

MALLABY: Right. And in the face of—and in the face of doubtfully authentic data in China, the game is often to look at proxies for economic activity and see whether there is a better story of a recovery. And obviously, what happens next in China may shed light on whether the rest of the world economy can expect to have a V-shaped recovery coming out of this or whether it will be a much more slow and prolonged process.

And there’s a few anecdotes to sort of, you know—which, again, are at least proxies for real data. And I’d just love for you to give us a sense of your feel for whether these—you know, are these indicators that something is being—that the data are being cooked, or is it—or are these too simple to matter? I’ll just give you a couple of the examples I find.

GOODMAN: Well—yeah.

MALLABY: Yeah, just let me give you some—what I have on my list and you can tell me if you think it’s serious. So a story to the effect that idle factory machinery is being switched on to boost electricity consumption to make it look as if electricity consumption is going up, and therefore growth must be going up. Travel between cities is apparently less than half its normal level. People not going out to shop because they want to avoid large crowds. Only five hundred out of eleven thousand cinemas have reopened. Does that kind of stuff tell us much or not much?

GOODMAN: Yeah, I mean, and I’d add a couple to that. You know, all forty-two Apple stores in China have reopened and apparently there are, you know, lengthy lines outside them as there used to be, but the lines are perhaps long because people are being socially distant—you know, a couple meters apart. Or traffic in the major cities has picked up pretty significantly, back to sort of 90 percent levels. But that may be a reflection that people are driving rather than taking the subway. I understand that’s true in other cities like London, New York perhaps. So, yeah, I think—I think there is—the electricity example you give is one that has—there have been—there have been examples of in the past, and so I think, you know, there—I think those questions are legitimate here.

But that said, I also—you know, I do think that things have turned the corner from where it was about, you know, a month or so ago, where things were really pretty much locked down, certainly in Hubei and surrounding areas, and even in, you know, Beijing and Shanghai and other places. So I do think there’s been an improvement, but probably exaggerated.

MALLABY: Let’s turn to Isabelle on Europe. Let’s just start with the kind of basic question, Isabelle: How big is this negative hit to output?

MATEOS Y LAGO: Sure. Hi, everybody.

Well, look, Europe is now unquestionably at the epicenter of this pandemic. There’s over three hundred thousand active cases, and the four largest economies in the EU plus the U.K. are now in full lockdown with people confined at home and all nonessential businesses shut down. So it’s so bad it’s kind of hard to put very hard numbers on the damage to activity.

Having said that, the French statistic institute, Insee, bravely stuck their neck out on Friday and published an estimate of activity in France, which they put at 65 percent of normal; so, in other words, down 35 percent. And frankly, all of the serious attempts that I’ve seen at making an estimate, from whether top down or bottom up, of the costs of these lockdown measures are in that sort of ballpark. So that’s massive.

But of course, the good news is that after a couple of weeks of (erring ?), we finally have in place a very bold and pretty coordinated policy response. We’ve got the ECB, that has deployed essentially an unlimited QE program which could finance as much as 7 ½ percent of GDP of stimulus, but again is notionally unlimited, through the end of the year. We’ve had massive prudential relief to banks. We’ve had fiscal stimulus measures adopted by each country, which on average are around 2 percent of EU GDP in direct stimulus, plus around 13 percent in guarantees to the private sector so that—so that companies that have to hibernate don’t go bust. We’ve had suspension of state-aid rules, suspension of fiscal rules.

So all this is going to help cushion the blow and make sure that the economy, while it goes into cardiac arrest, doesn’t stay there for very long. But there’s no denying that the shock is a very severe one, and—albeit it’s a temporary one, and hopefully it won’t last more than, you know, a quarter or so. There will be a lot of—there will be a lot to digest afterwards. And the path of the—of the recovery has a lot of question marks around it.

MALLABY: Isabelle, the—you know, one way in which Asia is different to both Europe and the U.S. is that the Chinese policy response has been, I think, relatively muted. I mean, maybe that just looks that way because—since the Chinese state owns large amounts of the economy it doesn’t have to announce a big fiscal package because it can transfer, you know, within the government sector, but nonetheless you do have these two regions—Europe and the U.S.—which have done an enormous monetary and fiscal response. And the outlook kind of depends on that struggle that you’re describing between a massive real shock versus a big official sector attempt to offset that. Do you think that sort of the structure of the European state and the way its tentacles reach into the economy will make it easier to deliver meaningful economic support than might be the case in the U.S.?

MATEOS Y LAGO: Yes, that has to be the case. And that’s true both in terms of the size of the—of the automatic stabilizers and in terms of, you know, the share of the economy that depends directly or indirectly on the government. So that’s clearly helpful.

Against that, however, there is a structure of government—of economic governance that is—that is really challenging, you know, compared to unitary countries like China or the United States. I think for now we’ve achieved a kind of beautiful degree of monetary-fiscal coordination, even though nobody put that label on it. But the fact the ECB has expanded a blanket that tells governments go ahead and spend all you have to spend on this—on this crisis, but you know, will it extend beyond the end of the year? I think there are much—many more questions around that, which is why this question of, you know, debt mutualization has resurfaced. And there’s some gathering momentum behind the idea of a corona fund, and it’s really because of this question that, OK, beyond the immediate urgencies of dealing with this economic shutdown, how are—how are the European governance institutions going to deal with, you know, debt burdens that are going to be anywhere between ten and thirty points of GDP higher once we get out of this, country by country? And how do you finance that? And how do you—how do you prevent bumbling from this crisis into a sovereign-debt crisis, you know, to the way Europe did in 2012?

MALLABY: Yeah. So I mean, this is one of those debates as to whether changes in behavior sparked by the coronavirus become permanent or whether they are temporary. I mean, will people basically switch to telemedicine and never go back in advanced economies, for example? Or you know, other ways in which we might fly less, and use Zoom more? With eurozone cohesion there’s been this, as you say, impressive demonstration of solidarity within the eurozone initially. And the question is whether that’s a telemedicine example or not. Is that a reasonable way to frame it?

MATEOS Y LAGO: Yes, I—yeah, I think you could frame it that way. I would note, though, that initially, you know, there was something like a week or so when it looked like, after having been a narrowly Chinese problem, it looked like it was a narrowly Italian problem. And frankly, there was—during that first week—very little solidarity. And then it became clear that, you know, Spain, and France, and Germany were only, you know, between one and two weeks behind, and that it was actually a symmetric shock that was going to hit everybody. And that’s when really you saw the fully coordinated response emerge.

But I think, frankly, it’s too soon to say whether we’re going to be in a permanently more coordinated setup once the crisis abates. I believe we will be, because frankly there’s no alternative. But right now the policymakers are not there. And we could see this very clearly last week when the European Council, which is a meeting of EU leaders, failed to agree on measures to go beyond what has been announced at the national level on the fiscal side to kind of have, you know, permanent solidarity. And there’s still a deep divide there. I think ultimately people will realize there’s just no alternative to developing a common approach for dealing with the aftermath of this phenomenal burst of public spending that this crisis has justified.

But I could see a situation whereby you kind of isolate the COVID-19 related spending and debt burden, and deal with it in a—in a coordinated way, that has a lot of solidarity in it, but without fundamentally revisiting, you know, everything else in the sort of day-to-day policymaking way. I’m sure a number of countries would still insist on having discipline and orthodoxy, et cetera, in the—in the normal steady state. But exactly how you get there is not—is not completely straightforward.

MALLABY: And, Isabelle, last question, which is going to be sort of a segue to what I also want to ask Lewis, which is, you know, if you look back at 2008 one of the policy lessons that came out of that crisis, at least in sort of, as it were, the general understanding of how macro works in policy circles and so forth, maybe not among specialists, was that, you know, central banks have unlimited money. They can create as much as they want when a crisis comes in order to fight implosion in the financial sector. And in the circumstances of a major negative shock, because there won’t be inflation, you can print as much money almost as you like. And the people who predicted that this would lead to inflation were proved wrong. And so there’s been a demonstration of the firepower from central banks.

The question today, it seems to me, is whether we’re going to learn another lesson, but this time about the fiscal firepower. In an environment where inflation is quiescent, interest rates have been stagnant for the last decade also, you know, the cost of national debt is lower than we thought. And the use of sort of this emergency spending may be safer than we would have thought if this had happened ten, twenty years ago, at least in advanced economies. How do you—how do you feel about that debate? Do you think that fiscal firepower is being overused, or do you think it’s going to end up in retrospect looking like it was safe?

MATEOS Y LAGO: No, I mean, look, I think it depends entirely on what kind of—what kind of central bank you have. If you have a central bank like in Japan or in the United States, who’s effectively prepared and institutionally free to say: I’m just going to, you know, pin interest rates at the level where any level of debt can be financed, then indeed you don’t have any problem, as long as your economy, you know, grows. Then you’re absolutely fine. The problem, again, sort of for Europe is that this is not the case. Instead, we have a central bank that is explicitly prohibited from financing government deficit. And that’s going to be a problem. (Laughs.) That’s going to be a problem.

And again, Japan, or the U.S., or potentially in the U.K., a very different situation. But the conundrum for the euro area is going to be how do you manage to keep interest rates low enough that they’re not a problem in terms of debt sustainability while staying within the strictures of the European treaties, which say they cannot engage in monetary financing of fiscal deficits.

MALLABY: Very interesting.

Lewis, let’s move to the U.S. One thing I noticed in a Nomura economic analysis you were kind enough to share, is that your base case has negative growth in the U.S. far lower than the other main economies, with the exception of Italy. Why is the U.S. likely to be the worst affected?

ALEXANDER: So, first of all, I think we’re all sort of struggling to catch up to what’s going on. Look, I think it’s clear to us that you’re seeing a very large disruption to economic activity. And we’ve sort of gone to a kind of a bottoms-up approach, where we’ve looked at industries by state and made judgements about which industries are being disrupted more by the social distancing. And you do that kind of exercise. And it’s not hard to get to a level of—the level of GDP being something like fifteen percentage points below normal. If I compare that to Insee’s estimate of sixty-five (percent), I would note it’s not quite that bad. But, look, I think we’re all trying to make judgements here.

If I could compare the nature of the outbreak in the U.S. to Europe, I would say it’s very similar. As we’ve looked at it, as Isabelle mentioned, pretty much all the major countries in Europe seem to be on the same track as Italy. If you look at the national data for the U.S., we’re pretty much on that same track as well. And so I’m not sure I would, you know, draw huge distinctions between the U.S. and Europe on that grounds.

I think, to, you know, maybe talk a little bit about there’s initial downdraft, which is an awful—is essentially determined by the social distancing, and then there’s the recovery. And there, I think the thing we struggle with is, on the one hand, what really is the trajectory of the social distancing going to be? To what extent after the peak of this has passed, hopefully within a matter of weeks, what is that sort of baseline level of social interaction that we’re going to want to maintain, and what’s the economic constraint that that imposes? There’s also the question of how effective is the policy response? As you’ve mentioned, we’ve had a big fiscal response, but as we’ve thought about that I think there are questions about it in an environment where people are so constrained in terms of how they want to spend their funds, how effective that fiscal response is going to be at protecting aggregate demand.

And then there’s a question of, frankly, how much damage you do along the way. We’re going to lose a lot of businesses. A lot of people are going to be unemployed. We had a record number of initial claims for unemployment last week in the U.S. We’re expecting another number on that order of magnitude for this week. That’s potentially six million unemployed in two weeks. That’s pretty stunning. So I’m not sure that’s an answer directly to your question, but these are extraordinary times.

MALLABY: And so in your forecast, because of that, you talk about three scenarios, since it’s impossible to pin yourself to one. I mean, it’s impossible anyway with forecasting, but especially now. So talk a bit about, you know, in your negative scenario you have some scary conjectures, like social distancing becomes socially intolerable, and so you get unrest, and that spirals into a whole different level of disruption—politically, socially, but also economically. On the other hand, there’s a good scenario. So just give us a feel for what the range is between good and bad.

ALEXANDER: Yeah. So look, for the U.S. just on a year over year basis, you know, our sort of worst-case scenario has GDP being off something like 11 or 12 percent for the year. In the good scenario it’s more like 6. So it’s about a five-percentage point swing between sort of call it 6 percent and 11 percent on the year over year basis. That’s’ a pretty wide margin in terms of, you know, possible outcomes. And I want to stress that the bad scenario that that lays out is definitely not the worst possible scenario, but it is—it’s one that seems plausible to us.

It does involve, I think, a more protracted period of social distancing driving things, in the sense that the economy gets disrupted for an extended period of time because of all of these things. And I think there’s also questions in that worst-case scenario about how effective the policy response appears to be. Frankly, if people just save the money that is transferred to them and businesses can’t really be protected, it’s not obvious that even a large amount of funds is really going to make a huge difference.

So for example, mostly what we’re talking about here in the U.S. now with respect to support for business is the provision of additional credit. And in an environment where revenues have collapsed and you’ve got businesses that are operating on very fine margins, it’s really not obvious that giving them credit extension is really that great an idea. And so I think there are a lot of questions about how effective that policy response could be.

With respect to monetary policy, I think Federal Reserve has pretty much done everything that they are legally capable of doing. It’s not quite true. There are a few little things they could do, like buying short-term municipal debt. But they’re pretty close to the limit in terms of what their authority allows. And while I think it helps, it’s very hard—it’s hard to see this as sort of totally offsetting that.

Now, on the other hand, I think if you want to have a positive scenario if we—if in some sense the social distancing is more effective in the short run, and you relatively quickly peak out on the number of cases, and then sort of the experiment that China’s running now about reopening goes well, you can imagine a scenario for the global economy where we’re all being too pessimistic about what the bounce back from this very significant contraction is going to be like.

If you look at, say, for example, what happened in Hong Kong, with respect to SARS in 2003, you had a very large disruption. But it was on that there was a very—which was followed by a very quick recovery. And to some extent, that reflected the fact that SARS was actually harder to transmit than COVID-19. And so it was in some sense easier to contain. But it is a suggestion that there is a potential for a more positive outcome.

MALLABY: And finally, Lewis, could you comment on this question of whether the crisis will end up demonstrating that fiscal firepower can be safely used, because interest rates are so low and that’s a sort of sustained state of the world?

ALEXANDER: Look, I’m reasonably optimistic about that in the sense that I don’t think even these very large fiscal programs are necessarily going to be constrained by interest rates that are notably higher and that you’re going to get into that cycle, at least in the U.S. I don’t think of that as being primarily about what the Fed is doing. I think that’s more about an environment where savings is high, investment is low, for all sorts of reasons, and the whole arguments around secular stagnation that have kind of got to very low interest rates before we got here. Look, I think it’s worth just remembering the cycle we’ve been through over the last ten years, and even over the last year and a half before this ever happened.

And that environment of very low interest rates is one which eases fiscal constraints. And I think that’s an environment where we’re going to—we’re certainly going to use them. And we’ll see how effective they are. But I do think we’re going to have a—this is going to be a period when they’re going to have a sense that the fiscal constraints we all worried about are not quite so binding.

MALLABY: And Isabelle was talking about, you know, the question of whether it becomes sustainable beyond the crisis. And obviously the central banks’ behavior is relevant there. But there’s numbers of ways that one could address high national debt, if indeed it does become a significant drag. There could be a wealth tax. You could have an inflation tax. If you could manage inflation to go up you could simply have an understanding that the central bank would monetize the debt on an ongoing basis. Do you see any of those options as being—will they be in the debate in three years from now? Or will the U.S. simply be able to sit there with a larger debt burden, and secular stagnation will take care of the cost of paying for it?

ALEXANDER: My forecast is based on the judgement that it’s going to be the latter. Secular stagnation will take care of it. But I think if you look at the, you know, history it’s interesting. The way we kind of got out of the very high debt levels that came out of World War II was essentially a kind of unanticipated inflation. If you look at it, real interest rates were remarkably low in the late ’40s and early ’50s. And that contributed to an environment where the debt burden declined. But I think that that was largely because inflation was more benign—sorry—inflation was in some sense higher than people expected. People were expecting deflation at the end of the war, that didn’t happen. And therefore, real interest rates turned out to be effectively lower. And that was an important contributor to it.

And if you could generate that unanticipated inflation, that’s a great way to deal with the burden. I’m just not very confident that we’re going to be able to face that. I think wealth taxes are kind of an obvious alternative. We’ve seen them in various places, at various times. What I have to admit, when I look at Japan, and periodically worry about fiscal sustainability there, that does seem like the obvious choice. I would note that my Japanese colleagues have been correct in not forecasting that, and not having a sense, in some sense, Japan was going to be forced into that. But I do think that secular stagnation outcome is probably the most likely one.

MALLABY: OK. And I want to ask one last question to Matt before we open up to people on the call. Which is, you know, in ’08-’09 multilateral coordination was a big part of the response. Do you see that—is there potential that is yet untapped on that side, Matt, for a global coordinated response?

GOODMAN: Before I answer that, can I just react to two things that were said in your—by Isabelle, and Lew, and you, in your earlier conversation, just quickly? In terms of the lingering effects of this crisis, the debt questions I think are particularly interesting. And, you know, I’d even go further beyond, you know, the debt incurred from this crisis to ask whether this is the new sort of normal for managing other crises that we certainly have in the U.S. around, you know, infrastructure, or education, or climate change, or other things, and whether now sort of the all holds are removed from taking on those challenges. That’s really a question.

In terms of your other question to Isabelle about lingering effects on travel, on, you know, using these sorts of technological solutions instead of interacting, I’m more skeptical, I think, about the lingering effects. I think, you know, just with 9/11 we didn’t stop flying after, you know, the initial shock period. You know, we just toughened, you know, cockpit doors. We took our shoes off in security lines and so forth. So I sort of—my gut tells me that we’re more likely to get back to something more like normal with some adjustments to our—you know, the way we—the way we do some things.

And then the final point on these sort of lingering effects is about data privacy. I think there’s a big set of issues around this, because to the extent we are going to get back to work but there’s still going to be, you know, some risk of the pandemic or the—you know, the lingering effects of this virus hanging around and causing occasional upticks in cases. We’re going to need to have, you know, careful testing, tracking, you know, contact tracing to make sure that people are identified who are at risk. And that’s going to presumably use these sort of data-enhanced technologies that will, you know, raise questions about the tradeoff between our desire to be safe from a health perspective, and have our privacy protected. So I think there’s a whole range of lingering questions there that are very interesting.

Anyway, to your question, I think, you know, there’s a big difference from ’08-’09 in terms of the multilateral response here. I’d say the need is even arguably greater because of the multifaceted nature of this crisis and the even greater, you know, interdependence among us since ’08-’09. But unfortunately, I think, you know, the prospects for multilateral response are a lot weaker. You know, it was good that the leaders of the G-20 met last week virtually. There were some, you know, useful things on getting finance ministers and health ministers together in the WHO context to talk about gaps in pandemic preparedness. You know, the $5 trillion number wasn’t really a real new number, it was just an agglomeration of what’s already being done. But, you know, some useful things the IMF and World Bank are committed to doing.

But you know, it was a pretty weak outcome by comparison to ’08-’09. You know, the trade language was really weak. There was no mention of energy. There just wasn’t much new. And I’d say overall the things that were in there felt very much like, you know, a bunch of parts that were—didn’t make up—the whole was less than the sum of the parts, if I could put it that way. And actually, as your former prime minister said in an op-ed in the FT the other day, he said, quote, “It the unanimous commitment in ’08 to share an objective build on the rock of practical measures that helped restore confidence where there had been none.” None of that’s around now.

And so—and you have, you know, key members, the U.S. and China, spatting with each other, and pointing fingers, and calling each other names. You have the Saudis and the Russians arguing over oil production. You know, you have the EU distracted. So you just don’t have the same ability to come together, but a huge need to do so, given the nature of this health pandemic, as well as the economic effects of it.

MALLABY: Thank you, Matt.

Shantelle (sp), would you open up for questions from the floor, please?

OPERATOR: Thank you very much.

(Gives queuing instructions.)

Our first question will come from Caroline Atkinson, Rock Creek Group.

Q: Hello.

MALLABY: Hello, Caroline Atkinson.

Q: Hi. Thanks very much. I’ve been promoted to the podium, I’ve been told. So, first of all, great discussion, great questions. Thanks very much.

I’ve got three quick points. The first, on your fiscal question, Sebastian, I think one of the lessons that we need to have learned from the great financial crisis was that we needed more fiscal policy. We withdrew stimulus too soon, especially in Europe. And so we had a much weaker, and later, and slower recovery than would have happened if monetary authorities had been supported by fiscal authorities. And I don’t think we need to worry at all right now about inflation deficits or debt. And I’m glad that’s a growing view amongst economists. My second point is on Matt’s comments about global cooperation, I think he’s completely right. We’ve had leaders’ meetings and IMFC meetings with very disappointing outcomes. And that leads me to my third point, which is also a question. Are we looking towards an emerging market crisis, and understand that ninety countries, or something, have come to the IMF? The IMF has about six (hundred), seven hundred billion available to lend. Some people estimate that you might need 2 ½ trillion. Is this the next shoe to drop? Thanks.

MALLABY: Caroline, are you still there? OK, I think she’s gone. All right. So, Lewis, would you like to talk about EM fragility?

ALEXANDER: Yeah. So I think that is a concern. And it’s a growing concern. Obviously you’ve got—the pandemic is, in some sense spreading to countries now that have weak health care systems. There’s still a lot of uncertainty about how that’s going to play out. That is, when you look at this outside of the core countries around China you see places like Indonesia that are potentially quite vulnerable, but places as far away as Mexico and Brazil that are—you know, potentially quite vulnerable as well.

Obviously you’ve got fiscal capacity issues. You’ve got external debt issues, in particular dollar-denominated debt, in all of those areas. And if we’re talking about as bad an outcome as we are for essentially aggregate demand in the industrial world and, you know, including China in that, that is a real risk. So I think all of those things are, I think, real concerns.

MALLABY: I’d love to hear what Isabelle thinks about this too, and whether there’s a way of boosting IMF capacity to help.

MATEOS Y LAGO: Yeah, sure. In fact, that was going to be one of the points on which I was hoping to be able to come back, but you know we had this discussion of the—you know, whether there can be too much fiscal response. And I would agree with what everybody else has said, including Caroline, on this for advanced economies. But for emerging markets, I think there are much bigger questions on how much they can afford to spend to deal with this upcoming corona crisis and interruption. And finding ways to boost the resources that can be made available to them is critical. And it’s, I think, urgent that the IMF certainly seems to be asking the G-20 to back a repeat of the 2009 playbook, with the doubling of its resources and, you know, the (allocation ?), and even potentially bring further in granting some debt relief to the—to the poorer countries. And the combination of all of that is likely to be necessary.

MALLABY: Shantelle (sp), can we have the next question?

OPERATOR: Thank you. Our next question will come from Somni Gupta (sic), New York Times.

Q: Somini Sengupta from the New York Times.

MALLABY: Hi. Go ahead.

Q: Hi. This is Somini Sengupta from the New York Times.

Just first a broad question, do you think economic recovery plans are going to trump any hopes of more ambitious climate targets from the major economies? I’m asking specifically about China, and the EU, and Japan? And specific to China, as China starts jumpstarting its economy, are you getting any signals that it’s going to spur more emissions-intensive industries, or something else? And when do you expect to get these first signals from China? Thanks.

MALLABY: Yeah. Matt, that’s actually something which I’ve been hearing about this question of whether the nature of stimulus—you know, during a crisis like this output goes down. That’s actually great for the climate. (Laughs.) But then, when you recover, the nature of the recovery is often quite pollution-intensive because of the factors through which the stimulus operates. Can you address that with respect to China?

GOODMAN: Well, I would certainly agree with the concern that’s raised. You’ve seen, obviously, the satellite—we’ve all seen, I think, these satellite images of the areas around, you know, Wuhan or around the other major metropolises of China and how dramatically the sort of emissions footprint has diminished during this crisis, and you start to now see images of it picking up again. And you’re right, in past situations like this there has been a tendency to—you know, to have more carbon-intensive activities in response or in the wake of these crises.

So I think it’s a real concern. I don’t have, you know, any new sort of insight into how the Chinese government is planning to, you know, balance that. They have, you know, for—you know, for their—in the recent past been, I think, more—taking more of a concerted effort to try to address some of the—at least the worst pockets of emissions around, again—(inaudible)—and areas that was—were in train, but being, you know, sort of offset by the slowing growth and the need for—even before the crisis, the health crisis, you know, you were seeing sort of slippage in their efforts to try to reduce emissions. But there was at least the commitment to doing that and an attempt, I think, from the government to try to address that.

But I don’t think that’s a priority right now. You know, the priority is to, you know, get the health situation stabilized and get people back to work. And if that’s in carbon-intensive industries, I think, you know, sort of for now so be it.

MALLABY: Isabelle, do you want to comment quickly as to—I mean, Europe’s, obviously, proud of its leadership on climate. Do you think that that’s going to be part of the recovery strategy, to have a green recovery?

MATEOS Y LAGO: Yes. I mean, I think absolutely. The level of commitment to sustainability, I don’t see any sign of that receding. It may be a question of, you know, dealing with the urgent issues first.

But if I may give another perspective, which is that of the asset manager that BlackRock is when, you know, we’re in constant conversations with very large institutional asset owners, and there’s certainly no tapering off of interest for sustainable investing strategies. In fact, these strategies have outperformed in the—in the recent market turmoil. And certainly be it in terms of, you know, official-sector work on how to integrate sustainability and their strategies and generally the whole complex of institutional asset owners, there’s just as much interest as before in greening their portfolios and incorporating climate change into their investment strategies.

MALLABY: Shantelle (sp), could we have another question, please?

OPERATOR: Thank you. Our next question will come from Joel Mentor, Colin Powell School.

MALLABY: Joel, go ahead.

Q: Thank you for your time and insight.

So my question is, we’ve talked about the potential impact of global—this crisis on global sovereign debt. I’d like to get your views, the outlook on the risk of potentially risky global corporate debt, especially with industries that are highly impacted—energy, hospitality, airlines. You know, airlines are important in Asia, energy in the U.S., et cetera—and also taking into account the potential exposure to nonbank lenders, which I know is greater in some regions than others. But what are your thoughts? Thank you.

MALLABY: Lewis, do you want to have a crack at that—nonbank lenders, corporate debt?

ALEXANDER: Sure. So, obviously, nonfinancial corporate debt had risen quite rapidly in the five years or so before these events. Second of all, you’ve seen a deterioration in underwriting standards. Both of those things are warning signs, quite independent of what’s going on. The magnitude of the disruption to businesses activity in the short run, obviously, kind of heightens all of those risks. And so it’s—you know, the potential for this to be a problem is significant.

Now, there is also a clear recognition of that in the policy response. So you have seen on the part of the fiscal package, certainly in the U.S., a big focus on providing support to vulnerable businesses. You’ve also seen in what the Fed is doing, again, a focus on, number one, providing demand for corporate credit of one form or another. So you’ve got this tug of war between kind of a vulnerable situation, a very bad circumstance, but a policy response which is designed to contain that.

I have no—there’s no question in my mind that we’re going to see a rise in corporate defaults. I think there’s no question in my mind that we’re going to see a period of stress in credit generally.

We’re also coming into this with a financial system that is pretty well-capitalized and has a lot of liquidity. I’m not in my base case building in serious stress in the core of the financial system.

You raised the question of nonbank or non-sort of traditional providers or credit. I think that is going to be an issue. We have seen an expansion, particularly in the fintech area. This is going to be a real stress test for that, and frankly one where I think it’s going to be a challenge for them to kind of manage it. So I think those are issues going forward.

It is certainly the case that when you look at credit more broadly globally the U.S. in some sense is arguably, as bad as it is, not the worst—the worst place. China is a notable case. In particular, it’s a place where, obviously, an awful lot of this is supported by the government in one form or another. But I think this is going to be a real stress test for that as well.

I’ll stop there.

MALLABY: Shantelle (sp), can we have maybe one more question?

OPERATOR: Thank you. Our next question will come from Rich Miller, Bloomberg News.

Q: Hi. Can you hear me?

MALLABY: Yes.

Q: Thank you very much for holding this.

I wonder if I could go back to the emerging-market question that Caroline Atkinson rose. It seems that on of the real stress points has been the rise of the dollar. I’m wondering, one, whether you guys agree with that; and, two, whether you think that the efforts by the Fed with the swap lines, et cetera, are sufficient or whether, you know, we’re going to need some other actions to keep the dollar from rising and aggravating the EM problems. Thank you.

MALLABY: Matt, would you like to have a crack at that? Because I think you did not address emerging markets the last time it came up.

GOODMAN: Yeah. Well, I think—I think it is something that a number of people have started to comment on; you know, the dollar’s general rise and the new risk of that and stress that that puts on the system. And you know, in terms of the swap lines, I think—I think in general that has been viewed as a useful—a very useful step that the Fed has taken to expand and extend those lines, and as a result some of the emerging markets may be—for example, you know, Brazil and Mexico may be in a—in a relatively better position because of that. But obviously, with the—you know, the underlying stresses from the health crisis and the associated economic and financial fallout, there is still, you know, huge risk out there, I think, in the emerging and less-developed world.

You know, whether this is the time to be looking at sort of more active steps to limit the rise of the dollar, I think—you know, I—having been trained once as a Treasury official, I was told to be careful not to comment on those possibilities. I don’t think that that’s something that is at the moment called for, but it may be ultimately something that will be part of the conversation among, you know, the key economies involved.

But maybe Lew (sp) has probably a better perspective on this.

MALLABY: You want to try, Lew (sp)?

ALEXANDER: Sure. Look, I think the swap lines are designed to deal with a slightly different problem. They’re designed to makes sure that there’s sufficient liquidity in financial systems outside the U.S. This is, obviously, coming in an environment where there’s an awful lot of dollar funding that goes on offshore, and we’ve already talked about levels of dollar-denominated debt around the world. And I think the central bank cooperation we’re seeing on that front is helpful and will in some sense deal with some of those stresses.

The question of the level of the dollar is somewhat different, and there I think it’s—there isn’t an obvious solution or policy mix problem. The Fed is doing everything it can to support the U.S. economy, and that inevitably means committing to very low interest rates. And then on the one hand it is the most direct and obvious way to limit the upside for the dollar, but in a world where people still, you know, demand safe assets, there’s a limit to how much they can do.

I don’t think this is an environment where one should expect any kind of (alert ?) intervention or whatnot, but I do think that that is something that will keep pressure on some of the other major central banks to, frankly, be as aggressive as the Fed has been in supporting their economies in part to prevent—frankly, to—you know, to make sure that their currencies are not suffering from—suffering from the problem of being too strong. So it’s a tough mix, and I think for the emerging markets there isn’t an obvious solution for them in an environment where they are—I think the questions about fiscal sustainability and whatnot, debt sustainability generally, become more key and are less easily managed.

MALLABY: Well, I’m glad we devoted some time to the emerging markets because that does seem to me to be the next frontier region where the public-health systems are weaker, and indeed also the fiscal space and generally the stimulus response space is much more limited.

I want to thank all of the three speakers—Matthew Goodman from the Center for Strategic and International Studies, Isabelle Mateos y Lago of BlackRock, and Lewis Alexander of Nomura—for participating on this Council on Foreign Relations World Economic Update call. And thank you to all of you for dialing in. Please stay healthy and we look forward to next time.

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