• Decline in GDP growth was due to contraction in personal consumption, gross private domestic investment and exports
• Ongoing efforts and measures from both the fiscal and monetary fronts will provide some support to economic growth in the coming quarters
• Recovery in US economy may be stalled if unemployment remains high and consistent rise in new Covid-19 cases

Impact on Covid-19 reflected in sharp decline in GDP growth in 2Q20

US GDP growth declined by a record 32.9% qoq on a seasonally adjusted annual rate in 2Q20 (from -5% in 1Q20) due to lockdowns or “stay-at-home” orders implemented in March and April. Even with partial lifting in some areas of the country in May and June, the US economy fell at its sharpest quarterly decline on record. According to the Bureau of Economic Analysis (BEA), the pandemic caused businesses and schools to continue to work remotely while consumers and businesses canceled, restricted or redirected their spending. Hence, the decline in US GDP in 2Q20 was reflected in the sharp contraction in personal consumption expenditures (-34.6%), gross private domestic investment (-49%) as well as exports (-64.1%). In contrast, government consumption expenditures and gross investment expanded by 2.7% qoq comapred to 1.3% in 1Q20. On a year-on-year basis, US GDP also contracted sharply by 9.5% yoy compared to +0.3% in 1Q20.

Fiscal stimulus and accommodative monetary policy to support growth

Going forward, after its biggest quarterly decline in 2Q20, we believe the US economy will likely recover in 3Q20 onwards, as further lifting of lockdowns and ongoing efforts and measures on both the fiscal and monetary fronts will likely provide some support to economic growth in the coming quarters. For instance, fiscal support in the US has been fairly strong where four stimulus packages have been introduced amounting to US$2.98trn, with the bulk of the expenditure from the Coronavirus Aid, Relief and Economy Security Act (“CARES Act”) estimated at US$2.3trn. The CARES Act was introduced to provide relief to households through one-time tax rebates to individuals, unemployment benefits, food safety net while businesses were assisted through loans and guarantees while governments will also benefit from transfers to state and local government. The US Government may introduce another US$1 trillion stimulus package for the 2021 fiscal year. Despite the stimulus and stabilisation in business activity, we believe the recovery in US economy may be stalled if unemployment remains high and sharper than expected rise in new Covid-19 cases.

In the recent FOMC statement, US Fed cautioned that development of the economy will largely depend on the course of the outbreak as the public health crisis is expected to weigh on economic activity, employment and inflation in the near term. This will also be downside risk to economic outlook in the medium term.

From monetary policy, the US Fed already lowered the Federal funds rate (FFR) by a total of 150bps since the start of the year to a low of 0-0.25% in an effort to mitigate the negative impact of Covid-19.

The US Fed noted that it will maintain the target range until the economy is able to “weather recent events and is on track to achieve its maximum employment and price stability.” According to the latest dot plot analysis, the US Fed is projecting to hold rates for the rest of 2020 and guided that its FFR will be staying at this near zero level until 2022. This indicates that the US economy may take several years before the economy recovers and restores to its full potential.

As a result, the US Fed announced recently that it will buy unlimited amounts of Treasury bonds and mortgage-backed securities in order to maintain smooth market functioning as well as to support the economy amid the Covid-19 pandemic. The US Fed’s balance sheet has expanded to a high of US$7.2trn in June from US$4.2trn in March. In the latest July FOMC meeting, the US Fed also guided that it will increase its holdings of Treasury securities and agency residential and commercial mortgagebacked securities at least at the current pace in order to maintain smooth market functioning. Recall that the Fed balance sheet was expanded in early 2015 from US$870bn to US$4.5trn during the 2008-09 Global Financial Crisis (GFC).

Nevertheless, there are some improvement in economic activity recently, which has been reflected in retail sales in June, which expanded by 7.5% mom in June from +18.2% mom in May, its second consecutive month of positive monthly growth. Business resumed operation and likely supported by the extension of the US$600 weekly unemployment benefit as well as the one-off US$1,200 stimulus check, both part of the CARES Act. Meanwhile, in the labour market, the unemployment rate has dropped for the second month in a row to 11.1% in June from a high of 14.7% in April in line with the continued resumption of economic activity. In addtion, in the housing market, sales of new US single-family homes surged by 13.8% mom to a near 13- year high in June supported by low interest rates.

However, there are still downside risks to the recovery in US economic growth. For instance, weekly initial jobless claims rose for the second consecutive week to 1.43 million for the week ending July 25 from 1.42 million in the previous week after gradually easing for nearly 4 months, as the rise in new cases may have caused several states to delay or scale back on the reopening of their economies. Besides that, the additional weekly US$600 for the unemployed ended on July 31 which will negatively impact those that are self employed and gig workers. There are also concerns that the rising number of new cases in the US could likely lead to lockdowns in certain states. If lockdowns are imposed, we believe this will also weigh on consumer sentiment and spending. As unemployment remains elevated and only a gradual improvement in nonfarm payrolls, we expect soft labour market conditions will also weigh on consumer spending. International Monetary Fund (IMF) is expecting US GDP growth to contract by 6.6% projected for 2020, before recovering to about 4.5% next year.

Source: Affin Hwang Research - 3 Aug 2020