We are living through some ‘Interesting Times’ in the vein of the Chinese curse, meaning some very challenging times which will test our collective mettle, and our tolerance for prolonged pain. And this current crisis will not only inflict economic pain, but has the added element of life-changing, and direct life-threatening aspects to it, which definitely give it grim overtones. It certainly adds heavy social, psychological, physiological and financial stress to societies, and wreaks havoc in all their economies.
This is apart from Trump’s idiotic antics of course, which have always added greater stress to the world at large and to America in particular. Today, the world’s largest economy, the USA, is also the most infected country in the world, with the greatest number of deaths reported from the COVID-19 pandemic – with cases still climbing. This fact has great repercussions around the world.
In the latest news about the economic hit that America has taken, it was confirmed that everyone’s fears were more than justified, as quarterly numbers came out worse than anticipated. In the first quarter, the economy shrank an eye-watering 4.8%, with the second quarter promising to be right off the charts.
A few days earlier, the nonpartisan US government agency, the Congressional Budget Office (‘CBO’), released its own figures and projections, and they confirmed that this economic crisis will be significantly worse than the 2008 global financial crisis, and will persist possibly to the end of 2021.
According to their estimations, the unemployment rates will climb up to 16% this year, and will be 10%+ the whole of next year - that is significant, as at the worst of it, the 2008 crisis reached maximum unemployment rate of 10%. This painful experience is going to be felt in spite of all the extraordinary government and Federal Reserve assistance and rescue packages, rolled-out post-haste in the months of March and April, with possibly more to come, as promised by the government and the Federal Reserve. Their current stated positions are - whatever it takes. But, in spite of that there is going to be a lot of economic pain, as this economic crisis will not only be a lot deeper than the 2008 Great Recession, but it will last a lot longer, with considerably greater consequences.
According to the CBO, the US real GDP is expected to decline 12% in the 2nd quarter of this year which is equivalent to a 40% contraction on an annual basis, and to a contraction of -5.6% for the full year of 2020. These are under any circumstance, shocking numbers.
A slow recovery is expected in 2021, with real GDP projected to grow at 2.8% on Q4-to-Q4 basis.
The Federal Budget Deficit will balloon to approximately $3.7 Trillion, in 2020, and will be an additional $2.8 Trillion in 2021, as compared to approximately $1.0 Trillion each year, projected prior to the Pandemic.
Federal Debt held by the public is estimated to be 101% of GDP by this fiscal year end, and 108% of GDP in 2021. In contrast, at the end of fiscal year 2019, the Federal Debt was at 79%, but now will increase by 20% in 2020 and by 26% in 2021.
Considering the sudden and unprecedented increase in Public Debt, it is safe to assume that the Federal Reserve Rate will be held close to zero for the foreseeable future. That was confirmed by the Fed Chairman on April 29th.
Three-Month Treasury Bills are projected to yield 0.1% for the years 2020 and 2021, and Ten-Year Treasury Notes are projected to yield on average 0.6% for 2020, and 0.7% through 2021.
Note: For the average person, and a lot of Institutional Funds, these numbers do not encourage any ‘saving accounts’, and in fact drives them to riskier assets in order to seek some kind of ‘decent’ return on their invested monies; which of course opens them to much greater risk, particularly in these volatile times.
One would really hate to be a ‘Pension Fund’ in these times.
The CBO disclaims that these projections are subject to ‘enormous uncertainty’. But as the CBO does analyze a vast amount of information from public and private sources to form their projections and opinions, it is useful to get a sense of the emerging economic landscape, as is being perceived by them currently.
It seems the CBO is leaning towards being a bit more conservative than some of the current across-the-board private sector expectations, as expressed daily on the more popular business networks. There, a significantly high number of analysts have been expecting and projecting a much quicker recovery than the CBO is projecting. In fact, on the average, financial players were expecting a more or less ‘V-shaped’ recovery. In some quarters that view may be starting to get tempered, but looking at the relatively fast and healthy rebound in the North American stock markets, it is difficult to see anything but the expectations of a quick recovery based on the hopes of an effective drug to mitigate the worst of the consequences of contracting the COVID-19 virus, and of course the guarantee of unlimited support from the Federal Reserve. These comments have to take into consideration that the stock markets are primarily boosted by the extraordinary support of the Federal Reserve Bank. But its participants are also, generally speaking, still more or less in a buoyant mood, now that ‘partial reopening’ in some parts of the country and in some parts of the economy is anticipated, and there is some early promise of Gilead’s drug ‘Remdesivir’, as it gets tested along with other drugs already on the market.
Considering the extraordinary extent of the spread of the COVID-19 virus in the US, with confirmed infection rates of over one million, with abysmally low levels of testing in the country, and therefore with the possibility of a far greater number of the population being actually infected (one prominent expert estimated real infection rate to be 10 to 20 times the currently estimate!!), we certainly think that any ‘early’ re-openings are really inviting greater troubles.
Trump and his supporters beg to differ, so re-openings it will be; and because of that fact, the probabilities of a second wave of infections has gone up significantly. This assumption is borne out by the recent experiences in Singapore, and even more recently in Germany, where after thinking they had the spread of the virus under control, they relaxed the lock-downs somewhat and suffered resurgence in new infections.
Since the Pandemic hit America, the economy has stalled and shed workers. There are currently approximately 30 Million new Americans applying for unemployment insurance since mid-March; and the CBO expects mass unemployment to persist through next year, and perhaps a lot longer.
The CBO expects that social-distancing, with some variations for regions, will continue till June; and since they have also incorporated reemergence of the pandemic, they anticipate some social-distancing to continue into mid 2021. The wild card in all of this is the fast development of an effective ‘cure’ for the virus via drugs in the short-term, and for the long-term, the development and global distribution of a successful and affordable vaccine. At this time, both of these potential ‘remedies’ are being worked on feverishly, by the best scientific and medical minds, around the world but, if these potential ‘remedies’ are still some months away at least, then the CBO’s projections will stand pretty much as stated.
Globally, the International Labor Organization estimates that approximately 1.6 Billion workers in the ‘informal industry’ are at risk of losing their jobs. That would represent nearly half the world’s workforce.
Around the world, as in North America, many businesses and systems are being shattered by the COVID-19 virus and will not fully recover, if at all. And even with the inevitable testing of a drug or a combination of drugs, which prove to tame the virus enough to prevent it from being lethal, the damage already done to the US and global economies will take years to undo, as the virus has permanently changed the previous concepts of ‘normal’, and ‘business-as-usual’. The myriad adjustments required to move forward will prove to be frustrating, difficult and damaging to many, impossible for some, and will provide new opportunities for others, in this forever-changed and challenged World.