Madrid 2,13 EUR -0,01 (-0,37 %)
Madrid 2,13 EUR -0,01 (-0,37 %)

FINANCE | 04.30.2020

The effect of the virus on the world’s largest economy

Thumbnail user

What the crisis in the US will leave behind is not only unprecedented figures at the macroeconomic and financial level, but also the words of its president, Donald Trump. Just this week, he made a controversial statement about the possibility of injecting coronavirus patients with disinfectant to kill the pathogen, which he described as a “sarcastic” comment a few hours later.

The United States is currently the country most affected by the virus. And its impact on the economy will therefore be enormous, as confirmed by employment figures—in five weeks, there were 26.5 million applications for unemployment benefits, surpassing the 22 million jobs created since 2010—and the evolution of business activity; the Department of Commerce released a critical GDP figure for the first quarter.

The outlook for the medium-term is not very encouraging. MAPFRE Economics places the fall in US GDP this year in a range that could fluctuate between 4.1 and 10.8 percent (adverse scenario), with an unemployment rate of 4.4 percent following unprecedented job destruction.

In an update to its latest Panorama report, MAPFRE Economics warns that the immediate impact of the crisis was caused by disruption to production chains, the unprecedented contraction in business activity, the strain on family and SME incomes, and difficulties for the energy sector linked to fracking, which echoed the sharp decrease in the energy prices due to the tensions between Saudi Arabia and Russia. 

“Activity will restart gradually and conditionally in the second half of the year, although sustained, visible growth will not be achieved until the end of the first half of 2021, at the earliest” explain the economists at MAPFRE Economics. “There is great uncertainty about recovery, in terms of both the estimates and structural effects that may arise from this crisis, in spite of the unprecedented monetary and fiscal easing measures that have been adopted,” they explain.

The measures introduced by the government, including the historic 2 trillion dollar economic support package aimed at relieving the financial strain on households and businesses, seek to mitigate economic damage and prevent disastrous consequences for society. “The aid package is engrained in a debt monetization scheme (it is counterbalanced by the Federal Reserve’s infinite debt purchases), and can be compared only to the efforts made during the Second World War,” MAPFRE Economics recalls. “According to economic theory, the excess liquidity generated by such measures will have an impact on inflation and debt, but at present all these measures seem justified,” add the economists.

The main risk to the US economy at the moment is an extension of the period of lockdown that prevents the economy from returning to normal before too long. The longer this period is, the greater the risk to the survival of certain businesses (mainly small and medium-sized enterprises) and the greater the risk of permanent job loss. Support measures are aimed at preventing this situation, but they will come at a cost that will be reflected in the level of sovereign debt.