The car that ran you over is not the one you saw
The biggest problem facing the global economy is that the shock provoked by the Coronavirus has caught the economic authorities with (almost) no instruments to avoid more intense negative effects on activity. The upshot, despite the hope the world will overcome this new virus quickly, is a steep drop of stock prices. In reaction to the 2008-09 crisis, the central banks cut interest rates and (correctly) engaged in aggressive quantitative easing, which together drastically lowered the yields on long-term bonds. But as things stand now, there is little or nothing that can be done with monetary policy. What remains is the use of fiscal policy, but this is restricted to decisions in the US and Germany, countries that have room for this. On the other hand, many countries are adopting precautionary measures to detain the spread of the virus. From the standpoint of international trade, the picture is much clearer. In 2019, global GDP expanded by 3%, the worst performance since the crisis of 2008-09. Before the Coronavirus outbreak, the world’s economy was already growing sluggishly, it should now weaken further. Brazil is affected through various channels, one of which is an additional deceleration of export growth, even with the weaker real. The sharp depreciation of the real in the past few days is partly the consequence of heightened risk aversion, which has caused the dollar to appreciate and lowered the yields on longer term Treasuries. But Brazil’s currency has weakened more than the average of other emerging countries’ currencies, reflecting the tendency we have identified repeatedly, of a “new normal” of the Brazilian economy.
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