Head of Macroeconomic Research
Summary: Direct cash handouts are the ultimate policy to recover from the coronavirus outbreak. We explain in the below analysis why it matters and why we should get ready for it in Europe.
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Direct cash handouts to households have already been decided in some countries and are being discussed in others:
Cash handouts are not a new policy tool. In 2011, Hong Kong gave about HK$6,000 to all permanent residents and Macau is a well-known place giving handouts on a regular basis. However, this is the first time ever that it has been discussed on such a broad scale.
Many observers point out that the above measures are helicopter money in the making. Strictly speaking, this is not helicopter money, but we agree it looks a lot like it. To be precise, measures of cash handouts refer to fiscal support, but they are directly inspired by helicopter money and temporary universal basic income (UBI). The underlying idea is to give away money to people (we can call it people’s bailout) while the crisis lasts. It is completely coherent to first use tax deferral and state guarantee to deal with the economic crisis, but it is unlikely that demand will recover fast when the lockdown measures will be lifted, which might happen in the next two to three weeks in Europe. We have all heard, here and there, anecdotal information that companies freeze hiring, terminate or choose not to renew contracts with freelancers, and fire employees in probation period. We already see that unemployment claims are rising in some U.S. states, such as Ohio, and the same situation is about to happen in Europe. For most countries, the COVID-19 outbreak will primarily be a demand shock. This is where cash handouts can make sense.
TIMING IS KEY – Cash handouts should be received as soon as shops reopen in order to provoke a positive consumer confidence shock.
TARGETED RESPONSE – Giving away money to anyone, including the top 10% of the population, is like throwing a drop in the ocean. It would probably be more efficient to target those most severely hit by the crisis, at least in a first step. It should also include a backstop to make sure this extra cash will be spent and not saved, especially in European countries with high propensity to save.
The European scheme
In Europe, the debate about direct cash handouts is at an early stage. As far as I know, there is no legislative initiative yet to give away money to citizens but, even before the COVID-19 outbreak, there was an increasing interest from policymakers and business people in some form of helicopter money.
Helicopter money implementation, in the form of direct cash transfer from the ECB to households, is close to zero in the short term. It would require agreement between all the euro area member states and the ECB, and a very complex mechanism based on central bank digital currency to distribute the extra cash, which is not ready yet.
That being said, the likelihood of a fiscal stimulus, which could be a mix between helicopter money and UBI, is becoming more and more probable as downside risks on demand are rising in many countries. At the end of April/beginning of May, most European countries will be confronted with a severe economic challenge: SMEs with increasing cash flow problems, higher unemployment and very low consumer confidence. At that very moment, cash handouts, as part of the counter-cyclical measures, will become obvious and promising policy tools, as it is already the case in the United States.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
