US economy could ‘easily’ contract 20-30% in Q2

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WASHINGTON – The business shutdowns caused by the coronavirus pandemic could “” cause the US to collapse by 20 to 30 per cent this quarter, Federal Reserve chairman Jerome Powell said on Sunday (May 17).

Although unemployment could peak at 20 to 25 per cent, a level not seen since the 1930s, Powell said the country will avoid another depression.

“I think there’s a good chance that there’ll be positive growth in the third quarter,” Powell told the CBS news programme 60 Minutes.

“Assuming there is not a second wave of the coronavirus, I think you will see the economy recover steadily through the second half of this year,” he said. “For the economy to fully recover people will have to be fully confident and that may have to await the arrival of a vaccine.”

In the interview, Powell repeatedly returned to health issues as central to the success of a US economic reopening, calling on Americans to “help each other through this” by adhering to social distancing rules as state and local governments begin to lift restrictions on social and economic activities.

“If we are thoughtful and careful about how we reopen the economy so that people take these social distancing measures forward and try to do what we can not to have another outbreak…then the recovery can begin fairly soon,” Powell said.

States are now easing restrictions imposed to slow the spread of the coronavirus. That has raised the hope of a gradual return to normal, but also has increased the risk of new infections. As Congress debates possible further economic relief, Powell has stretched the limits of typical central bank commentary, directly calling for more fiscal spending. In Sunday’s interview, he even urged people to wash their hands and wear masks to aid the recovery.

Under the best of circumstances it will be a long road, Powell said, with additional job losses likely through June, a rebound that takes time to “gather steam,” and some parts of the economy like the travel and entertainment industries possibly under pressure until there is a vaccine.

In the meantime, he said, the Fed and Congress may need to do more to ensure people can pay their bills. US lawmakers beginning in March committed US$3 trillion (S$4.28 trillion) to offset job losses and other economic troubles related to the pandemic. They are debating whether to do more. The Fed has approved a suite of programs as well to help businesses and financial markets function during the pandemic, and to try to limit personal and corporate bankruptcies.

Powell, who appears before the Senate Banking Committee on Tuesday to discuss how those rescue efforts are working, on Sunday said a longer lifeline may be needed.

“By keeping people and businesses out of insolvency just for maybe three to six more months….we can buy time with that,” as health authorities work on virus control. “That kind of support may be appropriate.”

“We’re not out of ammunition,” Powell said of the central bank and its willingness to expand existing programs or add new ones. “Not by a long shot.”

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