Impending Recession: A Fallout From COVID-19

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All the countries in the world are suffering from COVID-19 and trying to keep the lights on. The first priority of all governments is the health and safety of their people. The US economy overall and service industry, in particular, has been significantly impacted due to the sudden grind in the US economy.  Hundreds and thousands of employees have been laid off or furloughed (no work, no pay) in the US.

Under the assumption that the pandemic and required containment peaks in the second quarter for most countries in the world, and recedes in the second half of this year, in the April World Economic Outlook projected global growth in 2020 to fall to -3 per cent. Which is a major downgrade from January 2020.

Unemployment claims rise to 6.6 million and the US GDP is expected to drop by 20% in Q2’2020

The unemployment claims have shot from meager 280,000 two weeks ago to a staggering 6.6 million in March 28’2020. It paints a very bleak picture. It is very hard for economists to predict how the recovery curve will look like. Nevertheless, there are some estimates out there and one of them is from Reuters. According to estimates, the US economy is expected to contract Q1’2020 by 2.5%. The impact is somewhat benign in the first quarter as the Coronavirus hit the country towards the end of the quarter. It is predicted to get worst in the second quarter and the US GDP is expected to decrease by a staggering 20% in Q2’2020. However, the US may experience a V shape recovery and Q3’2020 may experience positive growth of 10.5%.

USA Unemployment rate and its growth in 2020
USA Unemployment Rate

Euro Area projections are similar to the US and their GDP expected to contract by 3.3% in Q1’2020 and 9.3% in Q2’2020 ad then bounce back by 5% in Q3’2020 and 1.0% in Q4’2020.

Federal Reserve reduced interest rate to near zero and Treasury announced an unprecedented buying program

These are unprecedented times and its a tough job for the government to estimate the impact of this sudden halt of the economy and take corrective actions to mitigate the impact.  One silver lining in this situation is that the memory of the 2008 financial crisis is still fresh. Both Federal Reserve and Treasury have taken sweeping steps to minimize the impact of COVID-19. The Federal Reserve has reduced the interest rate close to zero. It also plans to buy bank $700 billion bonds, $500 billion related to Treasuries and $200 billion for mortgage-backed securities.

Treasury Secretary Steve Mnuchin announced $2.2 trillion packages to provide liquidity to the economy and fight the impact of COVID-19. The Key highlights include 

  • $1,200 check to approximately 150 million Americans and $500 per child 
  • 4 months of expanded unemployment insurance. 
  • A $500 billion lending program for small businesses to facilitate employee retention 

Market volatility and your 401k plan

 The market volatility due to COVID-19 has evaporated billions of dollars out of average American only source of retirement i.e. their 401k plans. The average employee is not only worried about their health but also the fear of losing their job. On top of that their retirement assets are plummeting with the stock market crash.

Read our blog about  no penality withdrawal from 401k introduced by CARES Act. 

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Be safe and healthy.

Cofounders, Plootus 

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