Coronavirus Pandemic – The Economic Fallout

//Coronavirus Pandemic – The Economic Fallout

Can We Predict The Size Of The US Economic Impact?

Global Coronavirus cases are at nearly 1,000,000 (true as of April 2nd, latest stats here). Up from the 200,000 confirmed cases reported on March 18th and 226,978 cases now being confirmed in the US alone. As COVID-19 continues to spread through communities, public health policies have shifted from a stance of ‘containment’ to ‘delaying’ and ‘mitigation.’ All recognised health authorities now understand the virus will spread in society and our efforts at this point are purely to slow down the speed at which coronavirus spreads and limit the amount that catches it.

The coronavirus is first and foremost, and being treated as,  a public health issue but it is having a very major impact on the economy, financial markets and small businesses of America. At such a volatile time it can be difficult to make predictions but without sounding too pessimistic, businesses need to ensure they can survive their ‘worst case scenario’ forecasts. At this stage, can we begin to understand just how big the economic fallout is from the COVID-19 pandemic and how well poised the economy is to bounce back? 

Forecasts and Analysis

To answer questions as to how well the US is poised to recover and when this may be we first need to understand the level of impact COVID-19 will have. On March 31st, when revising its forecasts for US real GDP, Goldman Sachs recently commented, “We now forecast real GDP growth of -9% in Q1 and -34% in Q2 in q/q annualized terms.” An increase from its prior prediction of an estimated -6% and -24% reductions in the economic output figures.The bank also anticipates the unemployment rate to rise 15% by the midpoint of the year. 

This came after JP Morgan amended their GDP growth forecasts as well. On March 29th the forecasts they had predicted earlier in the month of a -4% decline in the first quarter and a -14% in the second quarter were amended to -10% in the first quarter and -25% in the second quarter. All major US banks are downgrading their forecasts, with a general consensus of a recession occurring during the first half of the year.

It Will Get Worse Before it Gets Better

There is no doubt about it, tough times lie ahead. Even the most ardent Trump outers might be forgiven for feeling some sympathy for the man who recently had to deliver this message, “We’re going to go through a tough two weeks. This is going to be a very painful two weeks. I want all Americans to be prepared for the hard days that lie ahead. We have held back 10,000 ventilators to handle the expected surge. Americans need to respond to the coming situation with an ironclad resolve.”

Indeed from an emotional and suffering point of view the worst is yet to come in the weeks ahead, whilst economic ramifications will continue for many months and in some sectors years. Social distancing, so vital to slow the spread of coronavirus, will continue to have severe implications on business as it takes time for these vital measures to take effect. 

There are some positive early signs however that social distancing does work and will ultimately be the first step to putting the community and economy on a road to recovery. After two weeks into the mandatory stay-at-home orders in San Francisco and Washington, there’s been evidence the curve of infections is flattening compared with other metropolitan areas in the US. The models suggest the earlier you begin social distancing the better. That’s why we’re hearing of many politicians talking of ‘bending the curve’ at the moment. It’s still upwards for now but modeling suggests it will begin to decline in time. The issue for the business community is that whilst all of this is occurring it’s unlikely people will be able to return to normality in their daily lives so the economic impact continues to ripple.

How Long is the US Government Anticipating Disruption at This Stage?

Through the policies of the Federal Reserve and Small Business Administration (SBA) we can begin to get an indication of how long the US government is preparing for right now. The Federal Reserve and SBA Paycheck Protection Program s a scheme designed to allow small businesses to continue with complete retention of staff and is set to run until the end of June. So the US Government is planning at this stage for the most significant period of social distancing and accompanying economic freeze to run until then. SBA Debt Relief initiatives are then in place so that the SBA pays all principal and interest expenses on small business loans for the next 6 months. Economic barriers will remain but as we reach the end of Q3 it’s a period of hopefully rising socio-economic activity.

Is the Coronavirus Response Timescale Achievable?

It is unlikely that these specific timelines will be met and the Treasury is already planning for longer term economic consequences. After all, we’re still seeing a significant fallout from countries earlier in the coronavirus cycle, such as China. Although it is showing tentative signs of recovery, economic activity in 2020 may decline for the first time in 44 years. Global governments didn’t make the correct predictions as to the spread of coronavirus either so it would be safer for businesses to presume at least 6 months of economic disruption. 

At some stage, however, the US economy will recover. As it has done after countless recessions in the past. Goldman Sachs is still predicting a ‘V-shape’ recovery, meaning the steep drop-off will lead to a bigger bounce in GDP growth of 19% in the third quarter. Ultimately predicting real GDP will fall by 6.2% in 2020 on an annual-average basis.

The $2.2 trillion economic relief package that Congress passed last week was more robust than many expected, and further fiscal and monetary easing should ease the longer-term impacts of COVID-19 and ultimately support growth later down the line. What these early policies show us is that economists and Congress agree the huge fallout of mass business closures would have far bigger consequences to the economy than this huge package of support. The goal for the US government is to save as many small businesses as possible, so the economy remains in the best possible position to fight back from COVID-19.