Covid-19 hit US economy already in recession: BofA; pegs job loss at 3.5 mn

US Federal Reserve urged not to restrict the quantum of stimulus measures

Coronavirus (Covid-19)-hit US economy has already sunk into recession, warned economists at BofA Securities in a recent report, though they expect this phase to be short-lived and see a bounce back in the third quarter (July–September) of 2020 (Q3-2020). In the interim, however, the research firm expects massive job losses and urges the US Federal Reserve not to restrict the quantum of stimulus measures.

“We believe that the US economy has fallen into recession, joining the rest of the world, and it is a deep plunge. We now expect the economy to collapse 12 per cent q-o-q seasonally adjusted annual rate (SAAR) in Q2 following only 0.5 per cent growth in 1Q. Although the decline is severe, we believe it will be fairly short lived,” wrote Michelle Meyer, US economist for BofA Securities in a recent co-authored report.

For the full year, BofA Securities forecasts a contraction of 0.8 per cent in gross domestic product (GDP). The impact of the COVID-19 health scare, BofA Securities said, will be deep rooted as it sees a massive jobs loss and wealth destruction as a fallout of the health scare. Salvation, it says, will come if there is a targeted and aggressive policy response to offset the loss of economic activity and ensure a sound financial system.

"We expect a total of approximately 3.5 million jobs will be lost with the biggest hit in Q2 of 1 million per month. This will send the unemployment rate higher, nearly doubling to 6.3 per cent. The industries to be hit the hardest are leisure & hospitality and retail. These sectors have a high share of hourly workers - about 80 per cent for the former and 70 per cent for the latter," BofA Securities cautions.

On its part, the US Federal Reserve (US Fed) has been proactive in responding to the developments and has unleashed massive stimulus packages over the past few weeks. The US central bank has already decided to relaunch short-term corporate debt purchase and had recently cut short-term rates to a target range of 0 per cent to 0.25 per cent.

As regards the policy response, BofA Securities says there should be no upper bound for the size of stimulus. While the US Fed is focused on restoring liquidity to the financial system, the US federal government should focus on the liquidity crunch in the real economy, it argues.

"The Fed has been aggressive by cutting to zero, launching QE and employing 2008 crisis tools. The government is still working on designing the stimulus but time is of the essence. The policy response will determine whether this deep recession in Q2 persists or proves fleeting. Washington - all eyes are on you," analysts at BofA Securities said.