Pandemic crushes economic growth like an empty tin can…

The data from the US reveals severe economic stress with 26 million people applying for unemployment benefits. This is about 15% of the US workforce. All the major indicators from retail sales to mortgages and industrial production, all point towards rapidly deteriorating economic conditions. This is the reality for the month of March, and April numbers are expected to display growing pain within the system. The raging pandemic which has already infected more than half a million people with a fatality much higher than that of China, the US wears a torn overcoat in an environment that is merciless in every sense of the term. The same is true of other major economies in Europe but with a much lesser degree of intensity, and it has not spared even Japan. In March, the US retail sales dipped by
8.70%, despite a rise in sales of almost 25% by stores that sell essentials like food and staples etc. This may be due to the fact that there has been some amount of overstocking or hoarding of essentials by the public. But the drastic fall seen in consumer durables and non-durables was close to 50% has outsmarted the rise in-store sales.

The Fed earlier on brought down the base rate to a range of 0% to 0.25%, bringing it back to the levels earlier seen during the recession of 2006-07. This coupled with the last cut of 0.50% is one of the deepest cuts the Fed has gone in for in the recent history. The action is a response to arresting the fall in US growth emanating from the primary as well as the secondary impact of the corona epidemic. Apart from this pure rate action, the Fed announced asset purchases to the tune of US$ 700 billion. This was split into US treasury notes purchases of US$ 500 billion, and the rest US$ 200 billion of mortgage securities. The objective of this action was to keep the markets liquid so that those who wish to move out of long-dated papers and longer-term investments should not find it difficult to do the switch in a volatile market. This would also become the basis for creating a semblance of stability in an otherwise risky and volatile market.

The central banks which joined the Fed for a concerted action are the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The objective is much-needed liquidity buffer and will help banks and financial institutions to offer credit facilities to consumers and businesses on a continuous basis. This removes any bottlenecks that may choke the credit lines in an uncertain business environment.





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