WASHINGTON, U.S. — The coronavirus pandemic ended a decade of US economic expansion, but the Federal Reserve pledged Wednesday to use every tool it has to help fuel a recovery.
The central bank warned that the virus continues to pose “considerable risks” to the economy, which after a 4.8 percent contraction in the first three months of the year likely will see an “unprecedented” decline in the second quarter.
And after record job losses in just a few weeks, Fed Chairman Jerome Powell warned that unemployment will take time to come down to the low level of recent years.
The GDP decline in the January-March period — the biggest fall in in 12 years — came after the pandemic forced businesses to close and halted purchases and investments, the Commerce Department said Wednesday.
The grim numbers underscore the damage done to the world’s largest economy by the pandemic, which already has caused an estimated 26 million job losses and sent Congress and President Donald Trump scrambling to cut the losses.
The coronavirus outbreak in United States has grown into the world’s largest and deadliest, with the country’s caseload rising to 1,034,884 and deaths hitting 60,316 after surpassing the death toll from the Vietnam War on Tuesday.
The economic contraction was all the more worrying since the most strict business shutdowns and stay-at-home orders did not occur until the final weeks of March. The Commerce Department acknowledged that it could not quantify the full economic effects of the virus.
Powell warned that “economic activity will likely drop at an unprecedented rate in the second quarter” at a rate “worse than we’ve seen.”
Private sector economists are predicting a decline in growth by as much as 40 percent in the second quarter amid the collapse in consumer spending and business investment.
Job losses have hit 26 million since mid-March, and companies are beginning to make more permanent cuts due to the uncertain outlook, including aerospace giant Boeing, which plans to slash 10 percent of its workforce.
It will take “some time to get back to anything nearly resembling full employment,” Powell said.
All the tools
The central bank moved quickly to get ahead of the bad news, slashing the benchmark lending rate to zero by the middle of last month following two emergency meetings.
The Fed’s policy-setting Federal Open Market Committee (FOMC) at the conclusion of its two-day meeting Wednesday pledged to hold rates at zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
Powell said while the US economy should rebound in the third quarter “it’s unlikely that it would bring us quickly all the way back to pre-crisis levels.”
The central bank is “committed to using our full range of tools to support the economy… to assure that the recovery when it comes will be as robust as possible,” Powell said in a press briefing.
And while Congress too has moved quickly to provide support for businesses and households, “it may well be the case that the economy will need more support from all of us, if the recovery is to be a robust one.”
And now is “not the time” to let a concern about fiscal deficits “get in the way of us winning this battle,” Powell said.
“This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer run productive capacity of the economy as possible,” Powell told reporters.
While the Fed cannot spend and its powers are limited to lending to viable borrowers, he said the central bank will do everything it can “to the absolute limit of those powers.”
The committee pledged to continue its efforts to inject funds into the financial system to ensure it doesn’t freeze up, including buying US Treasury debt, mortgage-backed securities and other corporate debt “in the amounts needed to support smooth market functioning.”
Meanwhile, economies of countries hardest hit by the pandemic also shrank in the first quarter with forecasts of bigger GDP decline for the year.
Italy, home to the eurozone’s third-largest economy, has been hard-hit with almost 28,000 deaths due to the virus, with the economy shrinking 4.8 percent in the first quarter compared to a eurozone average of 3.8 percent.
The Italian government on Thursday announced a slew of new measures to save its struggling economy amid fears the coronavirus pandemic could force a contraction of more than 10 percent of gross domestic product this year.
On Thursday, Prime Minister Giuseppe Conte told parliament that the government was revising down its economic forecast with a budget deficit increased by 55 billion euros ($60 billion) and a series of aid measures, including 25 billion euros for employment and income support and 15 billion euros for businesses.
The new budget forecasts a GDP contraction of eight percent this year overall, although it hopes the economy will begin to bounce back beginning in the third quarter.
The EU economy shrank by 3.5 percent in the first quarter, official data showed Thursday, the first major indication of the devastation facing the bloc as a result of coronavirus.
As lockdown measures imposed from March began to bite, the eurozone suffered an even bigger contraction — of 3.8 percent — in the first three months of the year, the EU’s official statistics agency Eurostat said.
Spain, the eurozone’s fourth largest economy, has consistently outperformed much of Europe since it emerged from a five-year slump in 2013, having expanded by 2.0 percent last year.
But the Bank of Spain warned last week that the country’s economic contraction this year would be “unprecedented in recent history”, estimating GDP would slump by between 6.6 percent and 13.6 percent depending on how long the lockdown lasts.
Meanwhile, Russia’s central bank on Friday said the economy would shrink by up to six percent this year, as hopes of a revival were dashed by the coronavirus and falling oil prices.
“The Bank of Russia has substantially reviewed its baseline scenario parameters. GDP is forecast to decrease by four to six percent in 2020,” it said in a statement.
Measures to prevent the spread of the coronavirus and the decline in oil prices have had “a substantial negative impact on economic activity”, it said.
In Mexico, the largest economy in Latin America after Brazil’s, GDP shrank 2.4 percent in the first quarter compared to the same period a year ago, according to an initial government estimate released Thursday.
Mexican GDP fell 1.6 percent compared to the last quarter of 2019, the national statistics institute said.
“The second quarter is likely to be much worse. We expect an 8 percent fall in GDP over this year as a whole — one of the worst in the emerging world,” analysts Capital Economics said in a note.