Why the US will struggle to deal with a COVID-19 recession

During the first of our fortnightly portfolio and market updates focussing on the investment implications of the spread of COVID-19, Jacob Mitchell explains why the US will struggle to deal with the stimulus it needs to offset the credit crunch and solvency risk resulting from the impacts of the spread of COVID-19. 

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Episode 1 Part 3 – Transcript:

Jacob Mitchell:

If you think about which of the larger countries or continents have gone into this unexpected recession, obviously the US, in some ways, is least prepared. 

It’s the latest – in terms of how infection growth rates have emerged – clearly China went into this first and seems to be emerging first. Europe came next and the US is last. 

Now with the US being last – so infection rates are growing faster than they are in Europe – it’s then a question of what can the US do to offset this?

The announcement of two trillion dollars of fiscal stimulus, we’re yet to get all the details but that’s a big number. We’re talking about 10% of GDP roughly and that’s against an environment where the fiscal deficit is already 4% of GDP. Now, the fiscal deficit should never have been 4% of GDP, let’s face it, with the economy in such great shape. You only need to go back three months and the US was experiencing one of the most longest, most positive economic environments in the history of the country and yet it had a recessionary-like fiscal deficit. 

So, the US is not in a great shape to deal with the inevitable stimulus that they need to offset the credit crunch and the solvency risk that is emerging in households and corporates. 

Europe and China somewhat have a degree more flexibility. Also we think from a social policy perspective China has locked down much harder and Europe has come next, and the US is somewhat vacillating between locking down the economy and thinking about offsetting the risks to the economy. 

Time will tell which policy is the right one but from where we sit we think a severe short lockdown seems to be the lowest risk strategy of containing both the health risks and the economic risks. 

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30 March 2020