U.S. Economy: Gradual recovery in the second half of 2020 after dramatic slump in economic activity

The Covid-19 pandemic and measures to curb it have led to a dramatic slump in economic performance in the United States. After the U.S. economy shrank by 4.8 percent annually in the first quarter of the current year, the slump in economic performance will be much more pronounced in the current second quarter. This is also noticeable on the job market. More than 30 million employees have lost their jobs since mid-March; the unemployment rate has increased significantly in the course of these developments and is likely to rise temporarily to around 20.0 percent.

The U.S. economy is likely to recover and grow in the second half of the year; however, the decline in growth from the first half of the year will not be offset until 2022. Obviously, such forecasts are associated with a high degree of uncertainty. For instance, there is the risk of a second wave of the pandemic and global tensions could increase. The U.S. government’s extensive fiscal measures, which total more than $ 2 trillion, are particularly supportive this year. These measures include direct transfers to low and middle income households, an increase and prolongation of unemployment benefits, and emergency loans for businesses. In addition, the U.S. Federal Reserve cut its key interest rates to almost zero percent in two steps. Extensive quantitative easing programs were also decided and various measures were taken to ensure liquidity in the financial system. With the gradual recovery of the U.S. economy, the situation on the labor market will also improve again; however, the unemployment rate is unlikely to drop below 10 percent until 2021. The trade conflict between the United States and China is likely to continue. In January, the so-called “Phase One” agreement agreed a sharp increase in U.S. exports to China, which is unrealistic given the COVID-19 outbreak and the global economic crisis. The pandemic has also significantly worsened the relationship between the two governments. All in all, the U.S. economy is expected to shrink by around 7 percent in 2020 in the baseline scenario. In a pessimistic scenario, the decline would be about 10 percent; in the optimistic scenario with a quick recovery, the decline would be 5 percent. Such a forecast is of course associated with very high levels of uncertainty.

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