The COVID-19 crisis has resulted in the most striking economic statistics ever seen, and likely to be seen for decades to come. Traditionally, recessions see a slowing of activity as individual economic agents react to poor policy choices or exogenous changes to demand and supply. The average contraction in the US economy is 17.5 months, according to the NBER Business Cycle Dating Committee. The most recent contraction, however, was a government-mandated halt of economic activity to prevent the spread of a virus. As seen in the chart below, it began in February 2020. We believe that it ended in April.
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The US labour market has broken records for the third month in a row. After shedding nearly 21 million jobs in April, nonfarm payrolls increased by 2.7 and 4.8 million in May and June respectively. Though other western countries have seen similar reductions in economic activity, furlough schemes implemented across Europe have prevented job losses from appearing in the data. Over 9 million British workers have been covered by the UK’s scheme, though these jobs remain at risk once the policy ends in October.
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Having spent the last decade close to the zero lower bound, central banks in the advanced economies have resorted to ‘unconventional’ monetary policy for the second crisis in a row, conducting large-scale asset purchases to support their economies and stay on track to meet their inflation target. The Federal Reserve’s balance sheet is the largest on record, currently standing at over 7 trillion dollars, holding financial assets worth nearly one-third of US GDP.
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In doing so, it has expanded the money supply at record rates. As seen in the chart below, broad money in circulation in the US was 23% higher in May than the same month last year. While the other major advanced economies trail behind in this respect, the BoJ appears to be focusing on yield curve control instead of outright purchases, and both the ECB and the Bank of England have committed to ‘unlimited’ quantitative easing.
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