US GDP may fall further amid COVID-19 spike, end of fiscal aid

US GDP may fall further amid COVID-19 spike, end of fiscal aid

The United States has yet again recorded its worst GDP slump in the second quarter despite May and June rebound.

The coronavirus pandemic has yet again proved how damaging its impact is to the global economy as U.S. gross domestic product (GDP) took a sharp downturn in the second quarter. Yet with the non-stop reports of new COVID-19 infections, business closures, as well as the expiration of unemployment benefits, it seems like the U.S. economy is in free-fall.

Q2 U.S. GDP shrinks by 33%

On Thursday, July 30, the Commerce Department reported the worst GDP decline in the U.S.’s history with an annualized rate of 32.9% in the second quarter. The drop marked the largest slump since the 1940s, according to the economists.

US GDP may fall further amid COVID-19 spike, end of fiscal aid

The historic drop is said to reflect the months when the country was under strict lockdown to contain the spread of coronavirus. In the first quarter, the U.S. economy dived by 4.8% before the recent slump as well.

The Bank of America in mid-July, however, reported an uptick in consumer spending that prompted an upward trend in May and June. The improvements in the first two months of the second quarter lead the bank’s analysts to declare the U.S. economy has entered a “healing phase.”

Yet the slight bounce-back was not enough to offset the loss incurred by the pandemic. Economists had previously forecasted a “35% annualized drop,” based on Bloomberg’s data.

It means that the actual GDP figures may look worse than what they are. According to economists, a 35% annualized rate means that the economy is 10% smaller than the first months of 2020.

Economic outlook may get worse

Despite the current situation, economists polled by Bloomberg expect that by the third quarter, the U.S. GDP will climb as much as 18%.

On the other hand, some see the U.S. economy falling further as crucial lifelines like the additional $600 weekly unemployment benefits are about to expire. ING Financial Markets chief international economist James Knightley, for instance, said that multiple blows could knock the GDP to decline further.

In a statement quoted by Bloomberg, he explained:

“One is the fear factor from Covid-19 on the rise and how that changes people’s behavior. Secondly, you got unemployment rising because states are reversing course on their reopenings. And then, third, you have the income squeeze.”

California earlier this month ordered all indoor businesses to close again following the sudden increase in new coronavirus infection in the state. Governor Newsom implemented stricter measures as well in an effort to contain community transmission.

Bloomberg economists said the situation calls for another or continuation of fiscal aids. According to them, “augmented unemployment benefits” are crucial to keeping the economy afloat—particularly with fragile consumer spending patterns and low income.

Featured image courtesy of Energepic.com/Pexels, Bureau of Economic Analysis

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