2020 inflation risk essay
The coronavirus outbreak is driving changes to the US economy so quickly as to make forecasting even more challenging than usual. But we can pin down both short- and long-term ways in which this shock is affecting the economy. Wars are external shocks; so are earthquakes … and diseases. COVID is an external shock that has the potential to upend the trajectory of the economy.
Economic implications of the coronavirus
The coronavirus outbreak is driving changes to the US economy so quickly as to make forecasting even more challenging than usual. But we can pin down both short- and long-term ways in which this shock is affecting the economy.
Wars are external shocks; so are earthquakes … and diseases. COVID is an external shock that has the potential to upend the trajectory of the economy. How things turn out depends largely on the response of economic policymakers and public health authorities—and the nature of that response is changing hourly. Go straight to smart. Get the Deloitte Insights app. Before the outbreak of the novel coronavirus, the US economy looked to be doing moderately well—our baseline was for growth, albeit fairly slow growth.
There were some weaknesses: Manufacturing had been in a funk for about a year, international trade had stopped growing, and business investment was falling. But the glide path to a soft landing was in sight. The initial impact on the US economy—just after it showed up in China—appeared to be muted: Supply chain impacts would affect some companies, for sure, but the overall impact on the United States was unlikely to be large.
First, the global economy is already experiencing a sudden, significant downturn. The initial supply chain problems from China will likely be multiplied as other countries experience outbreaks of the disease. US producers have not yet felt the full impact of the China shutdown, but the next few months may see significant interruptions of activity related to breaks in the global supply chain.
Second, the global decline in commodity prices—particularly oil prices—will likely reduce investment spending in the United States.
Mining—mainly oil and gas extraction—accounted for 5 percent of private investment spending in the last year available. The oil price war between Russia and Saudi Arabia will probably drive investment in this sector down substantially, reducing demand for manufactured goods such as pipes and machinery.
In —16, a similar decline in oil prices drove the entire manufacturing sector into decline. The impact now on an already weak US manufacturing sector is likely to be significant. Third, even under relatively benign assumptions about the future course of the illness, US GDP growth will likely plunge in the first quarter, and very likely fall further in the second quarter. The somewhat spontaneous adoption of social-distancing measures that picked up in the second week of March may reduce the speed of the spread of the disease—and will very likely be reflected in reduced economic activity.
The steep decline we are already seeing in sectors such as travel, leisure, and hospitality—and the decline in durable goods purchases and factory production—will push demand and GDP into a tailspin. Reports of mass layoffs suggest that unemployment numbers will jump as well. Fourth, financial markets have experienced a crash. There is no more appropriate word for it.
The headline-grabbing equity market decline is itself probably not a huge problem. In —01, financial markets continued to function well even as equity markets declined substantially. The larger problem now is in corporate debt markets, particularly those that issued riskier debt. The current recovery has seen an unusually high share of lower-rated corporate debt. Credit spreads—the difference between the yield on highly rated corporate debt and low-rated corporate debt—spiked in March.
That could create knock-on effects as financial market institutions start to be concerned about their counterparties in short-term credit markets.
The Fed has been willing—and has taken extraordinary steps—to provide as much liquidity as the market needs, but even under the best of circumstances, credit will be harder to get, and the cost of capital higher. We believe that the immediate economic impact is likely to fade within the year, as a vaccine or the natural progression of an epidemic reduces the number of infections and consumers venture out of their homes to resume eating at restaurants and shopping for more than groceries and hand sanitizer.
The economy will likely recover quickly once that happens. And over the five-year horizon of our forecast, longer-term questions will remain key to understanding how the economy will develop. We continue to pay careful attention to these in our forecast, and we discuss them in our sectoral descriptions. Our scenarios are designed to demonstrate the different paths we might expect the US economy to follow in the wake of the COVID outbreak. In the first two scenarios, we assume that the disease outbreak begins to recede by the beginning of May, and people are able to return to normal activities during the late spring and summer.
In the third scenario, outbreaks of the disease continue to affect economic activity for over a year. GDP falls by more than twice the amount of the average postwar recession but begins to recover in late as the disease is brought under control. Aggressive monetary and fiscal policy help jump-start the recovery, as does recovery abroad.
GDP falls 8. The shrinking economy uncovers weak financial structure in some economies and sectors, particularly those that have a substantial debt burden. This stresses the financial system and adds to the problems of companies that are more robust financially, as lending dries up. The combination of supply-side limits, weak demand, and financial crisis throws the economy into a recession. Quick, substantial fiscal and monetary intervention creates enough demand to lift the economy out of recession by mid, and sees a strong recovery.
Long hard trek to recovery 20 percent probability : As the economy struggles to recovery from the initial recession, regional outbreaks of COVID continue for about two years, or a bit longer than the —19 outbreak of Spanish influenza. Each regional outbreak is accompanied by interruptions of economic activity in that region. This is compounded by overall slow growth, as consumers put on hold big-ticket purchases such as automobiles and home renovations. Households and businesses are wary at first of making major expenditures.
As a result, growth remains slow for another year, until people are confident that the disease is not going to recur. After falling substantially in , GDP is flat in , and unemployment remains high. Growth then picks up to 3 percent or more by and remains high for another year because of pent-up demand for big-ticket items, combined with very accommodative monetary and fiscal policy.
For all the daily speculation about how political developments might affect consumer choices, when it comes to spending decisions, political noise seems to be just that—in the background—to consumers who seem focused on their own situations. COVID disease is different: Anybody who has encountered an empty shelf in the grocery store can attest to an immediate impact. But the short-term lift to retail sales—especially online sales—will almost certainly be offset quickly by the lack of traffic in car dealerships, furniture showrooms, and other places where people buy big-ticket items.
And consumer confidence will almost certainly take a hit. Beyond the next few months, the key question is jobs. As long as employment growth picks up as the outbreak wanes, consumer spending will pick up as well. If employment lags even after the disease runs its course, consumers will be reluctant to return to purchase those big-ticket items. The medium term presents a different picture. But now they are wiser and older, which is another challenge, as many baby boomers face imminent retirement with inadequate savings.
The housing market was picking up some steam before the outbreak hit. Housing construction appeared on an upward trajectory in the last few months of and in early , prompting us to be a bit more optimistic about housing in the short run. Construction activity may be a bit soft in the next few months because of supply chain and labor shortages. But the immediate fundamentals still look positive, and social distancing may have a smaller impact on the construction sector than on some others.
However, we remain a bit more pessimistic in the medium term. We created a simple model of the market based on demographics and reasonable assumptions about the depreciation of the housing stock, 7 and it suggests that housing starts are likely to settle into the 1. It was housing finance that ultimately created the crisis, not housing itself. Today, housing accounts for just under 4. Policy uncertainty has been one of the biggest potential roadblocks to strong investment spending.
Businesses were still reckoning with the investment implications of the tax bill when the US government introduced additional uncertainty with a significant shift in international trade policy. And the November elections will provide plenty of opportunity for nervous business leaders to wonder about the long-term viability of new investments.
On top of everything else, the Fed executed a degree turn in policy in , leaving Fed watchers arguing about what might happen next. Many officials cited trade tensions as one of the factors causing Open Market Committee members to change their recommendations about monetary policy.
COVID adds another source of uncertainty. Financing investment may become difficult very quickly, and future growth and demand are hardly assured. In the short term, businesses are more likely than before to put expansion plans on hold for the next few months.
Stepping back, business investment remains a problem area for more fundamental reasons. The cost of capital has been at historic lows over the past decade, but many business leaders have remained reluctant to take advantage of that cheap capital to raise investment. The imposition of tariffs on a wide variety of goods—and foreign retaliation in the form of tariffs on American products—creates even more uncertainty, particularly for manufacturing firms.
Some CEOs face a painful medium-term dilemma: deciding whether their businesses need to rebuild their supply chains. Industries such as automobile production have developed intricate networks across North America and are reaching into Asia and Europe, based on the long-standing assumption that materials and parts can be moved across borders with little cost or disruption. Leaders can no longer take that assumption for granted. The Deloitte economics team remains optimistic about investment in the medium term, since the United States remains a fundamentally good place to do business.
Beyond the impact of COVID, beyond the questions of tariffs and taxes, in the long run carefully considered investments will continue to provide businesses with a high payoff. Over the past few decades, business—especially manufacturing—has taken advantage of generally open borders and cheap transportation to cut costs and improve global efficiency.
The result is a complex matrix of production that makes the traditional measures of imports and exports somewhat misleading. Recent events appear to be placing this global manufacturing system at risk. The more fundamental problem is that businesses are likely to realize that they need more robust supply chains—which means finding alternative suppliers in other countries.
But still, the biggest challenge now facing the global trading system is the unpredictable tit-for-tat explosion of trade restrictions between China and the United States. The agreement on the Phase-one deal did not significantly reduce uncertainty, since the deal made unrealistic assumptions about Chinese purchases of US goods. White House trade adviser Peter Navarro argues that the tariffs are necessary to reduce the US trade deficit and to help the United States strengthen domestic industries such as steel production for strategic reasons.
But Commerce Secretary Wilbur Ross has stated that the goal is to force US trading partners to lower their own barriers to American exports. So are trade restrictions meant to be temporary, or permanent? Nobody knows for sure. A significant permanent change in border-crossing costs coupled with the desire for alternative suppliers could potentially reduce the value of capital investment put in place to take advantage of the pre global cost structure.
Essentially, the global capital stock could depreciate more quickly than our normal measures would suggest. In practical terms, some US plants and equipment could go idle without the ability to access foreign intermediate products at previously planned prices.
I would expect that, over the first half of , the pace of balance sheet In this essay, I will briefly discuss my outlook for the U.S. and global economies. This development will likely mean slower growth in China and risks to the trimmed mean is a good indicator of future headline PCE inflation trends. If inflation threatens, the central bank uses contractionary monetary policy to reduce which is similar to the us economy during the recession in –
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January 30, , by Raphie Hayat et al.
The paper illustrates the effect of interest rates on inflation briefly explaining what inflation is in terms of an individual and country perspective. Moreover, it provides the explanation of what the interest rates cause the exchange rates to move up or down and its implication to the entire economy. On an individual view the paper shows why the person makes the decision to spend more or save less while at the same time showing why they will likely save more and spend less.
Country risk of Russia : Economy
We use cookies to improve your experience on our website. With the COVID pandemic still spiraling out of control, the best economic outcome that anyone can hope for is a recession deeper than that following the financial crisis. But given the flailing policy response so far, the chances of a far worse outcome are increasing by the day. But all of this took around three years to play out. In the current crisis, similarly dire macroeconomic and financial outcomes have materialized in three weeks.
An Assessment of Economic Conditions and the Stance of Monetary Policy
We use cookies to improve your experience on our website. By using our website you consent to all cookies in accordance with our updated Cookie Notice. But all of this took around three years to play out. In the current crisis, similarly dire macroeconomic and financial outcomes have materialized in three weeks. In other words, every component of aggregate demand — consumption, capital spending, exports — is in unprecedented free fall. While most self-serving commentators have been anticipating a V-shaped downturn — with output falling sharply for one quarter and then rapidly recovering the next — it should now be clear that the COVID crisis is something else entirely. The contraction that is now underway looks to be neither V- nor U- nor L-shaped a sharp downturn followed by stagnation. Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting.
The recent flare-up of tensions over trade policy between the United States and its trading partners has transformed that topic into one of the most heated issues in recent political history. Consequences of recently heightened trade restrictions have spread throughout the American economy, its foreign counterparts, and the global economic environment.
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Everything you need to know about inflation
Russia:Country risk. After several years of negative growth due to massive capital flight, the collapse of the rouble, falling oil prices and trade sanctions imposed by the West after the Ukrainian crisis, the Russian economy has returned to modest growth since , driven mainly by mineral resource extraction and private consumption. The economic activity is expected to be mainly supported by the increase in public infrastructure spending in the framework of national projects and by the increase in labour supply due to pension reform. The Russian economy continued to grow modestly in , but industrial activity slowed down due to weaker external demand, lower oil production, in line with quotas agreed with OPEC and oil-exporting countries and higher financing costs linked in part to the American sanctions introduced in Euler Hermes, Since the recession, the government has pursued a prudent macroeconomic policy aimed at maintaining financial stability, and the central bank has carefully controlled inflation. Public debt has increased but remains low, representing According to IMF forecasts, public debt should continue to increase, reaching Inflation, estimated at 2. Inflation should drop to 3. The current account surplus remains comfortable above 90 billion USD. In his decree of May , President Vladimir Putin committed to increasing spending on infrastructure, health and education to 1. The budget , the first to forecast a surplus since , reflects the prudent strategy adopted by the authorities. Russia faces many challenges: a large state footprint, weak governance and institutions, insufficient infrastructure, low levels of competitiveness, underinvestment, low production capacity, dependence on raw materials, poor economic climate, lack of structural reforms and ageing of the population. The unemployment rate, estimated by the IMF at 4. Social inequalities remain high, especially between large cities and rural areas.
This is what the economic fallout from coronavirus could look like
In the period between the end of the Bretton Woods system in the early s and the global financial crisis in , the main challenge for central banks was to tackle excessively-high inflation and guard against its resurgence by counteracting pro-inflationary shocks. In my remarks today, I therefore plan to focus on the conduct of monetary policy when inflation is below target and explain why the ECB is maintaining an accommodative monetary policy stance. One danger is that low inflation that persists over the longer term provides only a small buffer against deflation: if inflation is low, it only takes a relatively small shock to tip the economy into deflation. The macroeconomic implications of deflation are well known. First, the expectation of falling prices delays purchases and investment. Second, the combination of falling output prices and downwardly rigid nominal wages damages the profitability of businesses and reduces the demand for labour. Third, deflation means that the real burden of nominal debt increases over time, making debt repayments more difficult for households, firms and governments. However, even in the absence of pronounced risks of deflation, there are substantial macroeconomic costs to persistently undershooting the inflation objective. First, excessively-low inflation can hamper beneficial macroeconomic adjustments.
