A big near-term economic hit from measures to contain COVID-19 is now unavoidable. But policymakers can still ward off a deeper spiral and build the foundations for recovery—if they take the right steps now.

The coronavirus represents an unprecedented threat to the world economy, perhaps the biggest since the Second World War. We believe that policymakers must take five essential steps to manage the public health and economic risks associated with the outbreak.

Initial Steps: Protecting Public Health, Businesses and Jobs

The first is to flatten the curve of the pandemic itself, in order to prevent the virus from overwhelming national health services as it nears its peak. We have already seen increased government spending on healthcare and unprecedented restrictions on everyday activity in many countries, including partial or full economic lockdowns.

But measures to control the spread of the virus will come at a heavy economic cost and need to be accompanied by complementary policies to soften the impact of the virus on the real economy. Vital protective measures include household income support, government loan guarantees for beleaguered companies and deferred taxation. Without these, a tsunami of bankruptcy and unemployment would sweep across the world, magnifying the economic impact several-fold.

There are important parallels here with policy responses seen during the global financial crisis (GFC). A decade ago, governments were forced to socialize banking-sector losses to prevent their economies from imploding. Today, they need to socialize losses incurred by households and firms as a result of deliberate policy action to control the spread of the virus. Unlike during the GFC, though, this isn’t a bailout—it’s called holistic policymaking and it’s exactly what’s needed in the current environment.

Additional Steps: Fiscal and Monetary Policy Actions Joined at the Hip

While measures to flatten the curve lie mainly in the hands of governments, central banks also have a vital role to play in the battle against the coronavirus.

Initially, they must provide liquidity support to the banks and financial markets in much the same way as they did during the GFC. Encouragingly, this is currently happening at breakneck speed. Next, they need to support growth, using conventional monetary policy and—far more important, given the limited ammunition at their disposal—unconventional monetary policy to help governments provide that support.

With public sector balance sheets already stretched, most governments simply don’t have the firepower to provide the support needed to prevent mass job layoffs and corporate bankruptcies. We saw the first signs of this last week, when global bond yields started to rise, partly because of concerns about increasing fiscal stimulus.