This Week In The Economy: France, Germany Propose €500 Billion Recovery Fund, CBO Expects Weak US Jobs Recovery, Fed Worried About Long-Term Damage, Housing Market Skid
By: Brai Odion-Esene
Tags: Federal Reserve, Macroeconomics, Monetary Policy, European Union, Coronavirus

This Week In The Economy: France, Germany Propose €500 Billion Recovery Fund, CBO Expects Weak US Jobs Recovery, Fed Worried About Long-Term Damage, Housing Market Skid

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Confirmed Coronavirus Cases Globally Cross 5 Million Mark

The number of confirmed COVID-19 cases around the world has now exceeded 5 million — of that number 2,822,226 are active cases and there have been 333,001 deaths. The United States has over 1.6 million confirmed cases — with 1,204,803 active and 95,087 fatalities.

The number of infections in Russia continues to soar, and it is now firmly ensconced in second place behind the United States. Overall, there are 326,448 confirmed COVID-19 cases in Russia, with 223,374 of them active and there have been 3,249 deaths.

Brazil has also experienced a significant spike in its coronavirus infections, with 310, 087 confirmed cases. The United Kingdom has 250,908 confirmed cases, 212,948 are active and there have been 36,042 deaths. Spain has 280,117 confirmed cases, 100,822 of them are active, and 28,001 fatalities.

France, Germany Propose Creation of European Recovery Fund

In certain parts of the world, governments are beginning a slow transition from fighting the pandemic and limiting the fallout of strict lockdowns, to contemplating recovery efforts to rebuild battered economies. In the European Union, the debate has raged around how much of the financial burden should be shared vs. each nation footing the bill individually.

Southern members of the bloc, notably Italy, have pushed for a joint rebuilding effort — using grants not loans that come with austerity strings attached, while fiscally-conservative Northern members such as Austria and the Netherlands are reluctant to loosen their purse strings.

A potential breakthrough occurred this week, as Germany Chancellor Angela Merkel and France President Emmanuel Macron proposed the creation of a €500 billion fund to finance the recovery. “This would not provide loans, but rather budget funding for the sectors and regions hit hardest by the crisis,” Merkel said in a briefing to announced the proposal. “We firmly believe that it is both justified and necessary to now provide funding for this from the European side that we will gradually deploy across several European budgets in the future.”

“We need to take action at the European level so that we emerge sound and stronger from this crisis,” she added.

However, the proposal will require the agreement of all 27 EU countries, as under the proposal member states would borrow together on financial markets and use the €500 billion to bring financing to hardest-hit economic sectors and regions.

CBO Predicts Steepest Labor Market Deterioration Since Great Depression

The U.S. Congressional Budget Office this week released updated economic projections to account for the coronavirus pandemic and the social distancing measures that shutdown economic activity.

It expects real GDP to contract by 11.2% in Q2, -37.7% compared to the same quarter a year ago, before picking up in the second half of 2020. Consumer spending, a vital engine of the U.S. economy, is forecast to plunge 11.6% in Q2, with the expectation for a minor rebound as household spending is likely to remain constrained.

Still, domestic consumption is expected to offset declines in business investment, which is expect to fall by 15.8% in 2020 (-12.2% alone in Q2) due to the significant drop in demand. “Furthermore, significantly lower oil prices will hit investment in the oil and gas industries disproportionately hard,” the CBO said.

On the jobs front, “the labor market is projected to see the steepest deterioration since the 1930s,” the report said, with the unemployment rate is expected to average 15% in Q2, up from less than 4% in the fourth quarter of 2019.

While the CBO does expect labor market conditions to improve more materially after Q3, it warns that “some degree of social distancing is still expected to persist through the third quarter of 2021,” placing partial constraints on business activity and the demand for labor. “In addition, the expected pace of labor market recovery is dampened by the prospect that many businesses may not survive the earlier, extended period of revenue loss,” it said.

It projects a still-high 8.6% unemployment rate by Q4 2021, with “about 3 million fewer people” projected to be in the labor force.

This comes as the U.S. Labor Department reported that 2,438,000 new claims for state unemployment benefits were processed last week, bringing the number of Americans who have filed for unemployment since mid-March to roughly 40 million.

The number of people continuing to receive unemployment insurance is now more than 25 million, clocking in at 25,073,000 for the week ending May 9, an increase of 2,525,000 from the previous week’s level.

Federal Reserve Officials Concerned About Long-Term Economic Damage

The CBO isn’t alone in its concern about prolonged damage from the pandemic to the U.S. economy. The Federal Reserve this week released the minutes from the April 28–29 meeting of the Federal Open Market Committee, the central bank’s policymaking body.

According to the report, Fed officials believe the effects of the coronavirus outbreak and the ongoing public health crisis “would pose considerable risks to the economic outlook over the medium term.”

They also expect household spending will be weighed down by a decrease in consumer confidence and a spike in precautionary saving. As for business activity, the Fed officials noted the “particular challenges” being faced by small businesses, and are concerned that a large number may not be able to endure a shock that had long-lasting financial effects.

“Participants were further concerned that even after social-distancing requirements were eased, some business models may no longer be economically viable, which could occur, for example, if consumers voluntarily continued to avoid participating in particular forms of economic activity. In addition, participants expressed concern that the possibility of secondary outbreaks of the virus may cause businesses for some time to be reluctant to engage in new projects, rehire workers, or make new capital expenditures,” the report added.

This could spell even more trouble for an already-worrying employment situation. Fed officials are concerned that temporary layoffs could become permanent, and that unemployed workers could face a loss of job-specific skills or may become discouraged and exit the labor force.

Furthermore, “Participants were additionally concerned that employees who were on low incomes would be the most severely affected by job cuts because they were employed in the industries most affected by the response to the outbreak or because their jobs were not amenable to being carried out remotely.”

A survey by the U.S. Census Bureau published this week showed 47% of respondents either lost employment income or another adult in their household had lost employment since March 13. Thirty-nine percent of adults expected that they or someone in their household would lose employment income over the next four weeks.

Being unable to pay rent or mortgage on time was reported by 10.7% of adults, while another 3.2% reported they deferred payments.

When asked about the likelihood of being able to pay next month’s rent or mortgage on time, 21.3% reported only slight or no confidence in being able to pay next month’s rent or mortgage on time.

Pandemic-Fueled U.S. Housing Market Skid Continues

The housing market has not been immune from the effects of the coronavirus outbreak and social distancing efforts, with building and sales activity screeching to a halt.

On the supply front, the Census Bureau said the number of building permits plunged 20.8% in April from March, and is down 19% compared to April 2019. Single-family home authorizations were down 24.3%.

As for the new residential construction, April housing starts fell 30.2% from March and are 29.7% below the April 2019 rate. Single-family housing starts are down 25.4% from March. The rate of home completions is 8% below March and down 12% from the same month a year ago.

As for demand, the National Association of Realtors reported home resales dropped 17.8% from March, and are down 17.2% from a year ago. The month-over-month drop is the largest since July 2010.

The median existing-home price for all housing types in April was $286,800, up 7.4% from April 2019 ($267,000), as prices increased in every region. This marks 98 straight months of year-over-year gains.

“Record-low mortgage rates are likely to remain in place for the rest of the year, and will be the key factor driving housing demand as state economies steadily reopen,” the NAR said, adding that “more listings and increased home construction will be needed to tame price growth.”

Housing inventory at the end of April totaled 1.47 million units, down 1.3% from March, and down 19.7% from one year ago (1.83 million). Unsold inventory sits at a 4.1-month supply at the current sales pace, up from 3.4-months in March and down from the 4.2-month figure recorded in April 2019.

Around The Horn

Cautious Optimism In Germany — The May ZEW Indicator of Economic Sentiment for Germany recorded an increase for the second time in a row, even as the assessment of the economic situation in Germany continued to decrease slightly. “Optimism is growing that there will be an economic turnaround from summer onwards. This is also reflected in the significant improvement in expectations for the individual sectors … . However, the catching-up process will take a long time,” the group said in a statement.

Record Drop In UK Retail Sales— April retail sales in the UK — the first full month of lockdown measures — fell by a record 18.1%, following a 5.2% decline in March. All sectors saw a monthly decline in volume sales except for a record increase in sales for non-store retailing at 18.0% and, not surprisingly, a continued increase in sales for alcohol stores at 2.3%. The share spent online soared to the highest on record in April 2020 at 30.7%, which compares with the 19.1% reported in April 2019.

EU, UK Brexit Talks Off To A Rocky Start — The lead negotiators for the EU and UK engaged in a war of words this week, albeit via correspondence, with a both sides accusing the other of negotiating in bad faith. In a letter to his counterpart, Michel Barnier, the UK’s David Frost accused the EU of offering much less favorable terms compared to free trade agreements negotiated with other countries. “Overall, at this moment in negotiations, what is on offer is not a fair free trade relationship between close economic partners, but a relatively low-quality trade agreement coming with unprecedented EU oversight of our laws and institutions,” he said.

Barnier countered in his own letter that “We do not accept selective benefits in the Single Market without the corresponding obligations, we also do not accept cherry picking from our past agreements. The EU is looking to the future, not to the past, in these negotiations.”

South Africa, Turkey Central Banks Lower Interest Rates — The Reserve Bank of South Africa this week lowered its key interest rate to 3.75%, aiming to ease financial conditions and provide support to households and firms against the economic implications of Covid-19. The Bank also eased regulatory requirements on banks to free up more capital for lending by financial institutions. Turkey’s central bank reduced its target interest rates from 8.75% to 8.25%, citing the “crucial importance to ensure the healthy functioning of financial markets, the credit channel and firms’ cash flows.”