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