US Fed: Years of high unemployment ahead
RATES TO REMAIN NEAR ZERO AMID 6.5% DROP IN 2020 GDP
The US Federal Reserve yesterday signalled years of extraordinary support for an economy facing a torturous slog back from the coronavirus pandemic, with policymakers projecting a 6.5 per cent decline in gross domestic product this year and a 9.3 per cent unemployment rate at year’s end.
In the first economic projections of the pandemic era, US central bank policymakers put into numbers what has been an emerging narrative: that the measures put in place to battle a health crisis will echo through the economy for years to come rather than be quickly reversed as commerce reopens.
The projections show the unemployment rate falling to 6.5 per cent at the end of 2021 and 5.5 per cent at the end of 2022 — a full 2 percentage points above where it was at the end of last year, representing millions of lost years of work. “The ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term and poses considerable risks to the economic outlook over the medium term,” the Fed said in its latest policy statement.
$120b pledged in monthly bond-buying
The response: officials see the key overnight interest rate remaining near zero through at least 2022.
Officials also promised to maintain bond purchases at least at the current pace of around $80 billion per month in Treasuries and $40 billion per month in agency and mortgage-backed securities a sign the Fed is beginning to shape its long-run strategy for the economic recovery. That recovery is expected to begin in earnest in 2021, with growth forecast at 5 per cent. The pledge to keep monetary policy loose until the US economy is back on track repeats a promise made early in the central bank’s response to the pandemic. The central bank has taken extraordinary steps already to support the economy.—
The global economy will suffer the biggest peacetime downturn in a century before it emerges next year from a coronavirus-inflicted recession, the OECD said yesterday.
Updating its outlook, the Organisation for Economic Cooperation and Development (OECD) forecast the global economy would contract 6.0 per cent this year before bouncing back with 5.2 per cent growth in 2021 — providing the outbreak is kept under control.
However, the Paris-based policy forum said an equally possible scenario of a second wave of contagion this year could see the global economy contract 7.6 per cent before growing only 2.8 per cent next year.
“By the end of 2021, the loss of income exceeds that of any previous recession over the last 100 years outside wartime, with dire and long-lasting consequences for people, firms and governments,” OECD chief economist Laurence Boone wrote in an introduction to the refreshed outlook.
With crisis responses set to shape economic and social prospects for the coming decade, she urged governments not to shy away from debt-financed spending to support low-paid workers and investment.
“Ultra-accommodative monetary policies and higher public debt are necessary and will be accepted as long as economic activity and inflation are depressed, and unemployment is high,” Boone said.
As the threat of a second wave of contagion keeps uncertainty high, Boone said now was no time to fan the flames of trade tensions and governments should cooperate on a treatment and vaccine for the virus.
The US economy, the world’s biggest, is seen contracting 7.3 per cent this year before growing 4.1 per cent next year. In the event of a second outbreak, the US recession would reach 8.5 per cent this year and the economy would grow only 1.9 per cent in 2021, the OECD said.
Eurozone outlook
Meanwhile, the euro area is heading for a downturn of 9.1 per cent this year followed by 6.5 per cent growth next year. But the recession could reach 11.5 per cent this year in the event of a second outbreak, followed by growth of 3.5 per cent in 2021. Britain is expected to see the worst downturn among the countries covered by the OECD, with its economy forecast to contract 11.5 per cent this year before recovering 9.0 per cent next year.
A second outbreak could trigger a slump of 14.0 per cent this year followed by a rebound of 5.0 per cent next year, the OECD said.
Stocks in Europe erased early gains along with US equityindex futures after the OECD report. The dollar held near a three-month low against a basket of peers.
Earlier in Asia, benchmarks dipped in China and Japan. Hong Kong stocks fluctuated, while South Korea and Australia eked out modest gains. Treasury yields edged lower, and crude oil retreated.
The OECD’s assessment reminded investors that the economic hit from the pandemic is far from over, even after US employment numbers seemed to signal a recovery was under way in the world’s biggest economy.
The CAC 40 in Paris surged 0.5 per cent to 5,070 while Germany’s DAX dropped 0.5 per cent to 12,560. The FTSE 100 in Britain, which the OECD estimated would see the sharpest
economic drop in the developed world, fell 0.2 per cent to 6,321.
“Markets have been cautious and technical indicators are stretched after the recent powerful rally,” strategists at Credit Agricole CIB led by Jean-Francois Paren said in a client note.