By The Biz Team (Nicholas)
The swift shock of the COVID-19 pandemic has left most areas of the society and the economy in disarray. During the early months of the year, when the virus was at the outbreak stage and reached the European continent, there was wide panic among the American population, causing confidence to dwindle and the stock market to slump. Though the economy and stock markets are not connected, they have experienced considerable drops from the time the pandemic was confirmed in America. Likewise, several economic indicators are trending in undesirable ways.
Economists polled that there would be an annualized economic contraction of 34.1%. It is the worst prediction of quarter performance since the Refinitiv agency started keeping quarterly records in 1947. It was also claimed to be much worse than the recession that was felt after the housing collapse in 2008. The same effects are now being felt on a global scale, considering the infection and mortality rates are still high in Asia, Europe, and Africa. According to forecasts, the global economy is also set to shrink by 5.2 percent. It would be the deepest recession since the Second World War. The more advanced countries' economic activity is also predicted to shrink by 7% in 2020 as the domestic demand, trade, and finance sectors have been much affected.
Since the record-keeping in GDP analysis started in 1947, the quarterly reports have never gone above a 3% drop in the economy. Now, there are a few key elements the virus has affected at home, which have contracted the economy on paper. The first is the rate of unemployment. Naturally, the loss of confidence has affected small and large businesses alike. Customers are not spending as usual, and some industries like aviation, have stalled entirely in light of social distancing and lockdown measures. At present, above 40 million people are out of the workforce for the last four months. These numbers mean a significant amount of people are saving more and not investing in the economy.
The second element is consumer spending. It makes up over 60% of the economy, and it reduced by 12.6% in April. Since then, consumer spending has stabilized even as the rates of infection increase, though economic incentives and media attitudes encourage a general perspective on the matter. The third element is monetary policies in place. Trillions of dollars have been borrowed to help in countering the problem. As a result, the supply of money from the central bank and government has risen. Interestingly, despite the increase of funds to the system, the inflation levels have significantly gone down below the ideal 2%. It has signaled a deflationary pressure within the economy.
Potentially Good News
Economists are predicting the economy is going to improve sharply during the current quarter. For one, the Federal Reserve Bank of New York is allegedly expecting an annualized increase of 13.3% between July and September. However, the bounce is dependent particularly on the trending health of the American consumer. It is not clear whether the rebound in consumption will be the same as COVID-19 infections steadily rise throughout most areas of the country, leading to many new restrictions. At the same time, high-frequency data is showing a significant sign of weakness. The Refinitiv agency also predicted other unemployment claims made during the coming week in the millions.
The Trump administration saw the incoming disaster as soon as the panic began in April and responded with several expansionist policies such as the stimulus checks to stabilize consumer spending. The economy did not go into a free-fall. The Federal Reserve also eased taxing on financial institutions, so interest rates increased to stimulate cash-flow. Trump also passed an executive order to force the states to enhance the unemployment benefits after an impasse on Capitol Hill wrecked the prospects of a bipartisan stimulus package taking effect.
The primary industries that improved were the financial, industrial, and energy sectors, though the investors who were keen to buy the company shares that were the most vulnerable, continued to consider the accommodation, tourism, and financial institutions. The policy incentives that were instituted by the government to increase confidence in the economy had staved off catastrophe, considering both the economy and the stock market are showing attempts to rally back to the numbers before the virus became a real issue. However, not everyone sees this as a viable solution for the long term.
The current Federal Reserve President, Eric Rosengren, recently raised fresh doubts about the viability of a full economic rebound, and indicated the virus would proceed in dictating the speed of the turnaround of the nation. He reiterated that as long as the virus posed a significant threat to public health, then a full economic recovery would be quite hard, as people often voluntarily avoid those activities that place their health at risk. For example, after spring break, several venues flouted the advisory on wearing masks and social distancing, resulting in a spike in infections. Since then, people have been more careful about the way they interact.
Some states which opened their economies, resolved to place further restrictions until the rates reduced. Rosengren's remarks were also a response to the plateauing job market, which showed a gain of 1.8 million positions, which was probably the rehiring of employees who had to be laid off pending better circumstances. That was well below the 4.8 million jobs that were gained in June. It shows that even though unemployment is decreasing in America, it may not go back to where it was before COVID-19, at least not any time soon. The same reflects the situation of the economy. It may not recover as quickly as was thought by many economists, as it is inextricably tied to the rate of infections and mortality.