Update on COVID-19 Impact on Economy and Financial Markets

Update on COVID-19 Impact on Economy and Financial Markets

by: Steven L. Skancke, Ph.D., Chief Economic Advisor at Keel Point and formerly White House and Treasury Department Staff Member

 

How long the COVID-19 pandemic will last and its impact on the economy and financial markets is difficult to predict. Steven L. Skancke, Chief Economic Advisor at Keel Point answers some of the frequently asked questions he is receiving.

Update on COVID-19 Impact on Economy and Financial Markets

1. What will be the impact of COVID-19 and containment measures on economic growth?

  • Containment measures have shuttered businesses and disrupted employment relationships critical to reopening the economy. March jobs lost through March 12 were 700,000.  New unemployment claims for the weeks ending March 20 and 27 were another 10 million, with another 6 million expected to be reported tomorrow, Thursday, April 9.
  • US economic growth is likely to be negative in 2020 First Quarter and down another 12% – 20% q/q in the second quarter (April -June 2020) depending on when containment measures are ended.
  • China’s growth is likely down 20% q/q in the first quarter. With China starting to lift containment measures, economic activity is rebounding and reportedly is approaching being ½ way back.  Wuhan reportedly is reopened, but Beijing is still locked down.
  • International trade has been disrupted, leading to lower economic growth in the US and globally. The global economy will likely decline 1.5% in 2020 vs positive growth of 2.9% projected just three months ago.  Trade will not recover fully, with globalization and its benefits declining over time.
  • US tariffs imposed during the last two years continue to undermine stimulus efforts costing households between $500-$1,700 per household. Tariffs also increase the cost of personal protective equipment (face masks and gloves) and medicines, according to a just-released CBO-Federal Reserve report.

 

2. When will the economy reopen and what will it look like after the COVID-19 pandemic?

  • Reopening the US economy will depend on widespread availability of testing and COVID-19 therapeutics that give workers and consumers confidence about marketplace safety. Former FDA Commissioner Gottleib has reported on prerequisites for full-scale reopening.
  • Eagerness to reopen soon is growing and preventing a premature return to “normalcy” is a growing concern. It is sparking the increasingly public debate about a trade-off between public health and economic wellbeing. Reopening and then a resurgence of COVID-19 infections and mortality would be catastrophic.
  • The US economy and most other developed market economies will experience an immediate recovery bounce and then return to a pre-crisis path of growth within 2 years. Some loss of output and income is permanent.

 

3. What about Financial Market recovery after the coronavirus?

  • Financial markets will recover when uncertainty about virus and containment impact and policy measures is resolved.
  • The recent rebound in financial markets signals a willingness to embrace reduced uncertainty even in the face of growing infection and mortality rates.
  • Unexpected increases in reported infections as testing becomes more widely available could provide a negative surprise in financial markets.
  • When the sustained turnaround begins, the S&P can be up as quickly as it was down.

 

4. What more can we expect from the White House, Congress and Federal Reserve?

  • So far, the fiscal and monetary stimulus programs are about $10 trillion in their combined potential effect, which is not widely understood or appreciated.
  • The Federal Reserve has been pro-active and pre-emptive in providing its full support for credit markets to assure they are not obstacles to business continuity or recovery. They are the star performers and have high credibility.
  • The Executive and Legislative branches have been slow to act and to enact measures that they find are increasingly challenging to implement. Their principal goals are the right ones:  keeping businesses solvent, preserving employment relationships, and supporting displaced workers. The delays in enactment and implementation are exacerbating individual and national hardships, however.
  • The US Congress is expected to provide further stimulus as the current measures are exhausted or prove ineffective. Measures providing further support for State and Local governments will be included, possibly adding further support for municipal debt markets to the Fed’s mandate.  There will also be a focus on US companies cutting jobs but continuing to pay dividends and buy back shares.
  • Though not likely to happen, the President could rescind or suspend all tariffs recently imposed against China and others. This would put $500-$1,700 back in consumer pockets beginning immediately.

 

5. How will we pay for all this?  Will this be a problem for inflation?

  • The US government costs (including reduced tax revenues) will be covered by increasing the Federal debt and expanding the Federal Reserve balance sheet. Some of the debt increase will be bought in capital markets and some by the Federal Reserve by increasing the money supply.  In the longer term, the additional debt and money creation may be inflationary.  In the shorter term, the larger problem is deflationary pressures from declining economic growth.