This is a summary of an article by Gavyn Davies that appeared in the FT on 23 May 2020. The full article can be found here:
https://www.ft.com/content/fffa1302-99ba-11ea-adb1-529f96d8a00b
Several aspects of the recession that has started in the US and other major economies are simply a much larger version of a “normal” recession, but there is one major difference from the past. Because fiscal policy has reacted so rapidly to the collapse in output, household disposable income has been shielded almost entirely from the weakening in the labour market, and the enormous drop in the consumption of discretionary goods and services has been accompanied by a jump in the savings ratio.
https://www.ft.com/content/fffa1302-99ba-11ea-adb1-529f96d8a00b
Several aspects of the recession that has started in the US and other major economies are simply a much larger version of a “normal” recession, but there is one major difference from the past. Because fiscal policy has reacted so rapidly to the collapse in output, household disposable income has been shielded almost entirely from the weakening in the labour market, and the enormous drop in the consumption of discretionary goods and services has been accompanied by a jump in the savings ratio.
In
the US, for example, household savings may exceed 20% of disposable income in
2020 Q2, about three times the level seen before the virus lockdowns began.
Although
savings will certainly diminish as the lockdowns on household behaviour are
eased, there may be a residual of precautionary savings which remain stubbornly
high.
A
complete withdrawal of the fiscal stimulus before consumer risk appetite has
returned to normal will slow the recovery and keep unemployment above the
natural rate for several more quarters. As Federal Reserve Chairman Jay Powell
has argued, more fiscal support may be needed to promote a full recovery in the
economy.
Update: April data show even larger surge than expected
Update: April data show even larger surge than expected
