US Economy Set to See a Partial Bounce Back?
The COVID-19 had an unforeseen impact on the global economy. The pandemic has left policymakers around the world in uncharted territory regarding global economic recovery. While concerns remain over the extent of the economic and humanitarian impact of the coronavirus outbreak, as the economic downturn of this magnitude has not occurred since the Second World War.
Recent data has shown that the global economy has entered into one of the worst recessions in history. The US gross domestic product (GDP) plunged 32.9% at an annual rate in 2Q20, as compared to 5.0% of contraction observed for 1Q20. The recorded contraction was the sharpest since the Second World War. Nevertheless, this staggering GDP plunge was not completely a surprise, as the markets were anticipating a decline of 34.1% on an annual basis for the quarter. However, the bleak statistics indicate an extraordinary pace at which economic activities declined. The dismal figures smashed hope of a smooth US economic recovery.
Meanwhile, the US government has acknowledged this slowdown in economic activity and indicated a possibility for another round of stimulus to support the US economy battered by the coronavirus pandemic. Additionally, the Federal Reserve (Fed) in its latest interest rate decision kept its key interest rate near zero and pledged to do whatever it takes to achieve its inflation target.
Factors that Contributed to This Historic GDP Plunge
Collectively, multiple factors have led to this severe decline in the second quarter of 2020. Part of the reason for this record GDP plunge is a resurgence of COVID-19 cases in various states of the US, especially the south and west regions. As cases soared to record levels following an equally significant number of deaths, those states had to postpone reopening of businesses and even had to reintroduce some of the lockdown restrictions. Furthermore, a resurgence of coronavirus infections led to drop in various business activities once again. Businesses such as bars, restaurants and retail outlets were among the hardest hit constituents of the economy.
Additionally, the US economy has been heavily reliant on consumer spending. Data indicates that household consumer spending accounts for approximately 70% of the US GDP. However, because of the global pandemic, consumer spending power has been dramatically reduced. As businesses were forced to shut down their numerous manufacturing facilities as well as services because of increasing virus infections, millions of the American either completely lost their income source or were furloughed. It inevitably reduced the demand for leisure goods, automobile, air travel as well as decreased overall spending on household items. And has eventually forced more businesses to close down, causing a downward spiral for the economy.
In light of the aforementioned situation, immediate resumption of economic activities does not seem possible. In addition, on-going tensions between the two largest economies i.e., the US and China continue to magnify the economic uncertainty. It inevitably means that the US economy is set to bounce back if it effectively stays clear of uncertainty, that has lead customers to spend less and faltered the economic activity.
The Impact of Coronavirus-led Economic Fallout May Spread Beyond Certain Sectors
Social distancing measures, whether inflicted by the government or the measures voluntarily accepted by the people, directly affected sectors like air travel, public transport, apparel industry etc. Early lay-offs were observed majorly in these sectors. However, it is likely that the same trend may be observed in other sectors eventually, which will resemble more to the traditional recession. On the other hand, the coronavirus pandemic has widened the gap between top-performing corporates versus other industries. For example, technology companies reported better economic profit despite uncertainties, than any other non-technology company.
The Recovery Road Ahead:
The path to recovery definitely looks a long way ahead. If we must look at the data, OECD has recently published an economic outlook about the global economic recovery. Most importantly OECD published its outlook considering two equally likely scenarios. In the first case, the virus is brought under control, while another case considers the scenario of the second wave of COVID-19 outbreak before the end of 2020.
The graph shows that the US economy is expected to contract 7.3% in a single hit scenario, while in double hit scenario it is expected to contract 8.5%. Additionally, the unemployment rate is expected to remain higher in Q4 of 2021.
The graph indicates 2020 projected change in GDP
Moreover, OECD Chief Economist Laurence Boone stated that restarting economies would require flexible policymaking while taking measures to avoid second coronavirus outbreak.
Thus, it is difficult to predict when the pandemic will end and how & when the global economy will recover. However, economic recovery largely depends upon how countries are able to contain the virus spread and development of a potential vaccine for the COVID-19.
The Next Normal
As we take a look at previous recessions in history, countries have successfully managed to recover from economic fallouts, though at a comparatively slower pace. For example, during the great depression, between the years 1929 to 1932, global GDP fell as much as 15%. However, some economies started to recover by mid-1930s. A most recent example would be the 2008 financial crisis, during the time unemployment rate doubled but gradually recovered to pre-recession levels in 2015. In both scenarios, it took significant time span for economies to recover. A similar type of measures can be taken by policymakers today to ensure global economic recovery.
What Awaits on the Other Side of Economic Recovery
During the pandemic e-commerce sector has grown considerably. In the coming years, it is likely that e-commerce will expand at a much faster pace than that of traditional brick and mortar settings. Additionally, the pandemic has underlined the growing trend for the nationalization of manufacturing facilities, as countries want to meet their own needs of critical supply goods. Also, it is likely that radical changes would be observed in the travel sector and the real estate sector.
Despite what data currently indicates, we are still at a point where it is difficult to foresee what the future holds. Policies from the government and successful containment of the coronavirus infection rate will ultimately determine the shape of the recovery curve.