The US GDP Slide

Why in news?

The United States has recorded the sharpest GDP decline in its history.

How much did GDP slide?

• The GDP of the US, the world’s largest economy, has contracted by 33% in the second quarter, or a near 10% quarter-over-quarter decline.
• This is in sharp contrast to the GDP data released by China, the world’s second-largest economy.
• China’s GDP growth swung back sharply into the black in the April-June quarter.

What explains the US GDP slide?

• Economists decoding the slide in the US GDP numbers point to a precipitous fall in consumption.
• [Consumption is the biggest component of American GDP that accounts for almost 70% of the economy.]
• Spending on goods and services has fallen at a seasonally adjusted annualised rate of 35% in the second quarter.
• Investments in buildings, equipment and intellectual property also fell at an annual rate of 49% while exports plunged 64%.
• The worrying news for the US is that the scale of this fall in the first quarter would be dwarfed by that in the second.
• Much of this pessimism can be attributed to the sharp surge in COVID-19 cases.

Why do the world’s top two economies offer contrasting trends?

• Similarities - Both the US and China are consumption-driven - over two-thirds of US GDP and more than one-half that of China.
• In their relief packages, both countries focussed on boosting consumption by attempting to put money in the hands of consumers.
• Divergent trends - China’s GDP growth showed a sharply divergent trend, swinging back sharply in the April-June quarter.

• This growth was driven by a bounce back in manufacturing output and a public spending boost.
• China recorded a V-shaped recovery (a sharp fall followed by an equally sharp recovery), which was something unexpected.
• This ensured that China effectively sidestepped a technical recession.
• [Technical Recession - Two consecutive quarters of negative growth]
• The US is clearly headed for a recession if the third-quarter projections are anything to go by.

What is the key differentiator between these two economies?

• The big differentiator is with respect to the services sector and consumption trends.
• Services sector - Both economies rely on the service sector for a range of value-additions and output that contribute to their respective GDP.
• In the US, continuing mobility restrictions have significantly hampered the return of such jobs.
• Such restrictions in the US have been geographically more widespread and longer-term.
• This is so because of its initial delay in responding to the spread of the disease, and fickle state government policies.
• China’s COVID-19 related support policies, including spending, loans and guarantees, amounted to just 2.5% of GDP.
• This is much higher than the 11% for the US.
• Consumption trends - China’s 3.2% year-on-year GDP growth showed a clear recovery in consumption trends.
• This is something that is evidently missing in the US.

What are the takeaways for India?

• Relaxations - In India, like in the US, the case count is surging, even as the government is progressively easing up restrictions.
• The Union Home Ministry has announced further relaxations in the lockdown guidelines, including opening up gyms.
• After this announcement, India recorded the biggest jump in the daily case count at over 55,000.
• Consumption - The share of consumption to GDP, at 57% in India, is closer to that of China.
• But the trend of normalisation of consumption is akin to what is being experienced in the US.
• There are uncertainties preventing people from upping their spends beyond essentials, notwithstanding the progressive unlockdowns.
• Recovery packages - India’s recovery could have another problem.
• Much of the Rs 20 lakh crore Covid-19 economic package has been liquidity driven, with little burden on the Central exchequer.
• It has been focused on pushing banks to extend credit on the back of government guarantees to sectors like small businesses, NBFCs, etc.

How would recovery happen in India?

• Most economic activities are losing two months of output.
• There is a subsequent localised lockdowns being announced by states in the wake of the surge in caseload.
• Therefore, the recovery process looks like it would be an extended one.
• The recovery in economic activity also depends on the quality of policy support.
• A consumption boost in India’s recovery is should not be ruled out.

Source: The Indian Express