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How the U.S. is gearing up to Battle the Massive Blow of Coronavirus

How the U.S. is gearing up to Battle the Massive Blow of Coronavirus

As Coronavirus is incessantly growing all across the globe, governments have focused all their attention on public health measures out of which lockdown has been the most important and impactful one. Such severe steps have been taken in order to stop the infection from spreading further but with the restricted movement of the population, the movement of the economy also got halted leading to some painful plummets of the stock market and a sudden slash in rate by the Federal Reserve. With alarming deaths every day and limited human movement, even the impact on the strong and advanced economy as the U.S. was inevitable.

Earlier the problem did not look as threatening as it has become now. As the virus continues to spread at a much faster rate and has taken an unpredictable turn, it continues to create a more complicated situation for governments, markets and policymakers making the path ahead look murky and undecidable. In this unforeseeable line of events, one thing that looks certain is negative growth. There is no clear answer as to how the plan would be implemented to recover the losses and return to the pre-outbreak output-level.

The Pathway to Hope

The only effective measure to tackle the disease is social distancing which has done its part well, but still, the fatalities are escalating forcing the government to enact social distancing more widely and for a longer time which is smothering the economy in the process. There is also a greater possibility of re-emergence of the virus as observed in the case of Singapore and Hong Kong which further fuels the fire of uncertainty as to when this virus will completely get eradicated.

The road ahead looks hazy which has created a significant problem for the financial markets, politicians, and policymakers as no forecast seem to work. For example, consensus estimates of unemployment were claimed to be 1.6 million in the last week of March, but the actual figure came out to be shocking with 3.28 million and the reason behind is numerous unknowable factors:

  • The characteristics of the virus are not completely understood and could change
  • The role of asymptomatic patients is not properly assessed
  • The real numbers of infection are still dubious
  • Uneven or delayed responses of policy leading to mismanagement

 

Evaluating the shape of the blow 

The theory of a recession is blunt and binary which indicated that the expectations have shifted from positive to negative growth for the upcoming two quarters. The shape of the shock would be determined by the structure of recoveries and progressions in the U.S. and the rest of the world. L, U, V shocks usually come in varying intensities. The question is where does the shock of the coronavirus fit in so far? Its severity is decided by the underlying properties of the virus, responses of policies, as well as the behavior of the corporate and the consumer in view of the hardship. Notwithstanding, the shape of the shock will depend upon the potency of the virus to deteriorate the economies’ supply side, especially in light of capital formation which indicates that both a deep V-shape as well as U-shape are possible. The fight ahead would be to avert U trajectory.

Assessing the damage mechanism

Any financial crisis impairs an economy’s supply side. In the case of coronavirus, it substantially aggrandized capital and liquidity problems. Given below are the two scenarios of COVID-19 leading to structural damage in U-shape:

Risks in Financial System: the unprecedented shock of COVID-19 has already disturbed the capital markets, precipitated a sudden response from central banks. If liquidity problems continue, it will only lead to a rise in capital problems. The prevailing financial crisis would adversely affect capital formation causing damage to productivity as well as labor.

Crippled real economy: a long period of social distancing will shatter capital formation leading to limited labor participation, and productivity growth. The immobility at this density would highly damage the supply side creating more challenging situations for policymakers.

Novel solutions for novel problems

In the U.S., politicians have come up with a $2 trillion to alleviate the flurry of coronavirus crisis. For favorable outcomes, innovative policies will have to be implemented. For example, introducing bridge loans with zero-interest loans to firms and households at least till the time crisis is completely resolved, flexible time for repayment, temporary suspension of mortgage payments for commercial and residential borrowers, revising the terms and conditions on existing loans. With proper and planned execution, these policies can have a favorable outcome.

Conclusion

It is just to say that the risk due to COVID-19 is threatening and for different countries, the policies will also be different depending upon the potency of medical researchers and policymakers to counter in innovative ways and the structural strength of economies to bear such shocks. As of now, we are yet to encounter as to how the United States create newer interventions, at a remarkable speed that will erase the unmanageable balance between lost lives and economic ordeal.