The economic downturn could lead to over 8 million job losses in the U.S., compared with 8.7 million in the Great Recession. The unemployment rate is expected to push toward 9% from the current half-century low of 3.5%, shy of the 10% peak in the Great Recession. The largest single-month spike in the post-war era was 1.3 ppts in 1949. Nearly one million Canadians could lose their jobs, sending its jobless rate to 10%.
In the absense of a vaccine, the social distancing and business closures now causing this unique recession will ultimately help to stem the outbreak. China’s Hubei province and South Korea managed to control the number of new cases after about five weeks of strict precautionary measures. If other nations, including the U.S., can successfully bend the outbreak curve by late April, activity could begin to recover by mid-May.
While this downturn will be both sharp and painful, the recovery could be equally forceful, teeing up a 30% annualized rebound in Q3 GDP. After weeks of near social isolation, people will be itching to make up for lost time when the panic ebbs. Most importantly, the policy response has been equally swift. An unprecedented $2.2 trillion of U.S. fiscal measures, weighing in at 10.3% of GDP (and about $1.6 trillion in direct support or 7.5% of GDP) could eclipse the expected peak-to-trough decline in GDP. The fiscal measures, including cash payments to households, increased unemployment insurance benefits, forgivable loans to small businesses that retain staff, and loans to hard-hit industries such as airlines, should help to contain insolvencies. The Canadian Government has announced more than $100 billion in measures (or 5% of GDP), including direct payments to households, enhanced employment insurance, a 75% wage subsidy and loans for businesses, and deferred taxes. The provinces have also announced support measures.
With its no-holds-barred monetary policy response, including a plethora of liquidity facilities, unlimited QE and unprecedented purchases of corporate bonds, the Fed has become the lender of last resort to nearly all borrowers. And, with core inflation likely to ease toward 1%, the prospect of returning to the 2% goal is now pushed farther into the future, suggesting that policy rates could remain near zero until 2022. The Bank of Canada has also quickly returned policy rates to near zero, while pledging to buy BAs and commercial paper to lend to businesses, Canadian Mortgage Bonds, and even government debt securities, a crisis measure deemed unnecessary during the last recession.
Of course, there are still big questions about the course of the outbreak and the number of smaller businesses that will survive to be in position to rehire. Much will depend on how aggressively lenders, landlords and governments grant payment forbearance on loans, rents and taxes. Even if all goes as well as can be expected, the economy likely won’t recover its output and job losses for some time. Even with expected 3.5% growth for the U.S. and Canada in 2021, the unemployment rates could still hover around 5.0% and 7.0%, respectively, next year, dialing their labour markets back to 2016.
Still, given the strong policy tailwind, there is at least hope now that another lengthy expansion can resume once this hurricane passes.