COVID-19 will hit US GDP but recovery may be V-shaped

Subject

US economic outlook.

Significance

Before the COVID-19 outbreak, economic activity was growing at 2.0-2.5%, the stock market and employment were close to record highs, new home sales were rising and consumer spending had momentum. The immediate outlook for the US economy is now very unclear as the number of COVID-19 cases has surged above 3,800 and the virus is present in 49 states, prompting President Donald Trump to declare a national emergency on March 13. To bolster financial market liquidity and support businesses and households, the Federal Reserve (Fed) cut rates by 100 basis points to 0-0.25% on March 15.

Impacts

• The public spending for the COVID-19 outbreak will add to the budget deficit as no party is willing to raise taxes in an election year.
• The Fed may cut rates more but will risk inflation if rates stay low too long; if recovery is rapid, rates may rise sooner than expected.
• Heavily indebted firms and individuals will seek assistance from the government, especially in the travel and entertainment industries.
• A sharper economic downturn will test Trump’s managerial skill as his voters expect him to be able to resolve their problems quickly.