Growth and inflation (Y/Y, %) On 12 March 2020, the tone in Washington was serene even as Italy, already swamped by the epidemic, was strengthening its lockdown measures and former Prime Minister Matteo Renzi was urging Europe to do the same. President Trump was convinced that a vaccine would be rapidly discovered and the virus would disappear quickly, with little propagation[1]. To the contrary, the situation has deteriorated rapidly, to the point that the World Health Organisation (WHO) is preparing to declare the US as the pandemic’s new epicentre.
Initial claimsAs we went to press, the world’s number one superpower had reported 280,000 confirmed cases and 7,000 deaths. Covid-19 contamination is progressing exponentially, comparable to the curves already seen in European affected countries.
With its federal structure, the US has taken a scattered approach to the pandemic. Since 15 March, the hardest hit states (New York and California) have imposed lockdown measures or social distancing on their residents, limiting the movements of non-essential workers and closing most recreational spaces (bars, restaurants, theatres, sports facilities, etc.) and retail stores. Other states, such as New Jersey, Illinois, Florida and Texas, have followed suit with more or less severity. Despite the President’s hopes of seeing “all the churches packing their pews again by Easter”, measures have been taken at the local level to protect residents, and only a very small list of places have put no restrictions into place of any kind. The US economy is freezing up. Industrial orders as depicted by the Investment Supply Manager (ISM) index – that is closely correlated with investment and economic activity – fell to 42.2 in March, the lowest level since 2009, and will continue to fall, raising the spectre of a record-breaking contraction of GDP in Q2 2020.
Coronavirus Aid, Relief, and Economic Security Act (USD mds) High-risk populations and massive fiscal support
Although the US has a leading-edge healthcare system, it is not well equipped to handle a mass epidemic. The highly-selective system is costly – the US devotes 17 points of GDP to healthcare, the highest among the OECD countries – but its hospital capacity is limited to only 2.8 beds per 1000 inhabitants, two times less than in France and three times less than in Germany. Without universal healthcare coverage, the system provides only limited access to those with no private insurance – i.e. nearly 106 million Americans (1 in 3)[2]. More often than not, health care protection is provided through jobs, and the surge in unemployment (see chart 2) will only increase the population’s vulnerability in the face of the pandemic.
Monetary Marshall PlanFinally aware of the stakes at hand, the Trump administration pushed Congress to pass the Coronavirus Aid, Relief, and Economic Security Act (CARES), an unprecedentedly large fiscal stimulus package (USD 2,200 bn, the equivalent to 10% of GDP or 50% of the annual Federal budget). The bill doubled in size under pressure from the Democrats, who have a majority in the House, to cover the needs of low-income individuals and those who have lost their jobs. In addition to guaranteed loans for companies, which could amount to as much as USD 900 bn, the Federal government will transfer roughly USD 630 bn to American households (see table 3) through tax credits or extended benefits. Using a means-tested system[3], each American household will receive a check from the Treasury for a maximum amount of USD 3,000 each. The Federal government will also top up unemployment benefits, which vary from state to state but which average roughly USD 300 a week, by USD 600 a week during the 4-month period ending 31 July 2020.
Monetary bazooka
The government is preparing to buffer an economic shock which it can no longer deny, and which has been largely foreseen by the markets and the Fed. Starting on 3 March, the Fed began cutting its key rates, slashing them to virtually zero on 15 March[4]. It reactivated the exceptional liquidity facilities that were set up during the 2008 financial crisis. Quantitative easing, the Fed’s securities purchasing programme, which had been raised to a maximum of USD 700 bn a year, is now being conducted with virtually no limits (see box 4). These actions, coupled with swap arrangements and concerted actions with other central banks, have helped restore some calm, at least temporarily, in the foreign exchange and bond markets, where the squeeze on USD liquidity has led many currencies to depreciate, and interest rate spreads have widened sharply.
