US economy plummets, hopes rest on support measures

The gross domestic product of the United States crashed in the first half of 2020. The latest growth figures from the second quarter show how deep the US economy has fallen: According to these figures, economic output fell at an annualized rate of almost 33 percent between April and June – the steepest decline in the US economy ever, at least in the period after the Second World War. Economic output already contracted in the first three months of the year at an annualized rate of 5 percent compared with the final quarter of 2019. The previous year’s level is a long way off.

The Corona pandemic is to blame for the crash: fear of contagion and tough lockdown measures caused enormous losses, particularly in terms of investment and private consumption. The number of unemployed rose to dizzying heights, with the unemployment rate peaking at almost 15 percent in April. This shook the consumption-driven US economy to its core.

In the meantime, however, the economy has made its way out of the deep gorge. It has climbed the first few metres surprisingly quickly. That gives hope. Thanks to the easing of many restrictions, numerous economic indicators recovered noticeably from June onwards. However, there have also been the first disappointments of late, such as the setback in consumer sentiment. The situation remains difficult.

That is why the time for support measures is now just right: a new fiscal program by the government is currently being negotiated. This will probably be based primarily on the continuation of consumer incentives. There is to be a new round of one-off payments to a majority of households. And unemployment benefits are also to continue to be topped up with central government subsidies. These measures make sense because they are quite capable of giving the economy a boost at the right time.

The central bank will also continue to support the economy: Although, as expected, the US monetary authorities did not make any fundamental changes to the monetary policy course at their meeting this week. However, they have emphasized that they will continue to use all monetary policy instruments at their disposal to support the U.S. economy. According to Federal Reserve Chairman Powell, a high degree of monetary policy support is still needed. The Federal Reserve will therefore continue its bond purchases at least at the current pace.

Nevertheless, the outlook for the US economy remains cloudy overall. The damage caused by the pandemic is too great to be made good in the current year. Uncertainty due to the virus remains high for the time being and this is dampening consumer spending and reducing companies‘ willingness to invest. For 2020 as a whole, we expect the United States‘ gross domestic product to decline by 5.0 percent compared with the previous year. Next year, by contrast, it is likely to grow only comparatively moderately at 4.0 percent.

 

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