US growth challenge sets stage for more policy support
US GDP fell by 9.5% year-on-year in the second quarter , and at an annualised rate of 32.9%, as pandemic-related social-distancing guidelines and various local restrictions caught up on economic activity.
Looking ahead, the latest news is not particularly reassuring. Coronavirus cases have been mounting again lately, led by southern states; which is affecting consumer behaviour. Several high-frequency indicators show that the improvement in the economy since the mid-April low stalled in July.
While our 2020 GDP forecast of -7.7% for the US is below the market consensus of -5.5% (although close to the International Monetary Fund’s -8.0%), we are not changing it at this stage given the downside risks to growth for the second half of the year. We confirm our central scenario of a deep asymmetric ‘U’ shaped in the US recovery rather than a ‘V’ shaped one.
We still expect Congress to pass a fiscal package worth at least USD1.0trn in the next two weeks that includes an extension of emergency federal unemployment benefits. This measure could be key to the growth outlook in the second half of the year. A weak economy and the ongoing health situation is a challenge for the re-election of Donald Trump, something highlighted by recent opinion polls.
The Federal Reserve remained in ‘wait and see’ mode at its policy meeting this week as it waits to see the details of a new fiscal package under discussion in Congress, but chairman Jerome Powell expressed concerns about the recent escalation in coronavirus cases and its economic impact. Monetary policy, Powell hinted, would stay accommodative for a while as the coronavirus crisis will leave sizeable scars on US growth and lead to lasting disinflationary pressure. There is a high possibility that the Fed will expand its USD120bn of asset purchases per month, potentially as soon as the next policy meeting on 16 September.
As the November elections approach, we do not think the Fed will be bothered too much by perceptions that it is helping one camp over the other. Whatever it does, we think the Fed can easily argue that it is acting within its mandate.