News

Bruno Cavalier
Chief Economist at ODDO BHF

In its most severe form, the coronavirus causes respiratory problems that may result in death. Asphyxia is also what threatens the economies of countries that have put in place lockdown measures on all or part of their territory. This has been the case in the US for around a week. Oxygen is therefore needed along with the tools and procedures for administering the right dose. The Fed and the US Treasury are at the helm. The Fed, which is the fastest to act, is placing hardly any limits on the scope of its intervention. The Senate recently adopted a relief package amounting to around 10 points of GDP.

The week's focus

In one week, 2% of the labour force have found themselves unemployed. There may be more next week, and more the week after, etc. This is unprecedented in the US history, but unfortunately it is the logical consequence of an economy that has shut down in a number of sectors. Nearly 50 million employees are directly at risk, those who work in retail (17 million), leisure, hotels and catering (15 million), transport (8 million) and various other services. These are typically sectors where median income is lower than the national average and where precautionary savings are low or non-existent. 

Shutting down the economy is the cure, if not for the virus, then in any case for its overly rapid spread. Since it is a public health goal, with broad backing from medical experts, there is no way to avoid a severe contraction in GDP and a spectacular rise in unemployment. Donald Trump is complaining about the cost of the public health crisis, but the early reopening of the US economy that he is promising (without having the authority to impose it on State governors) could just make things worse. The role of the policymakers is to offer maximum compensation to keep the economy fit to recover vigorously when the public health situation allows the lockdown measures to be lifted. Here we give a recap on the fiscal and monetary measures recently announced.

• Fiscal action – After some umming and ahing because this is an election year, the Senate passed a relief package1. Altogether, the aid, guarantees and spending total $ 2,200bn. The main lines are:
  • $ 290bn: cheques or tax rebates to households subject to means testing ($ 1,200 per adult and $ 500 per child)
  • $ 260bn: expansion of the maximum amount and duration of unemployment benefits
  • $ 450bn: guarantees for the programme of loans by the Fed (up to potentially $ 4.5 trillion) to large corporations and local governments.
  • $ 377bn: loans and loan guarantees for small businesses
  • $ 150bn: direct aid to states and local governments
  • $ 180bn: increased spending on the healthcare system
  • $ 280bn: cut in business tax
  • $ 50bn: direct loans to airlines and businesses that are critical to maintaining national security
  • $ 40bn: extension of various social benefits (food stamps)
  • And more than $ 100bn in various outlays
• Monetary action – Since the emergency rate cut on 3 March, the Fed has stepped up its interventions on all fronts:
  • Cut in interest rates to zero (-150bp in two weeks)
  • Virtual elimination of the discount window penalty (set at 0.25%) and stigma
  • Relaunching of QE, firstly with an envelope of $ 500m in Treasury securities and $ 200m in Mortgage-Backed Securities, with no limit thereafter.

   

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