(Reuters) – Top U.S. and European central bankers on Tuesday called for renewed government spending to support families and businesses as the battle against the coronavirus recession enters a newly critical phase.
The growth in new cases of COVID-19 is again accelerating in parts of the United States and Europe, raising the possibility of new restrictions on commerce even as whole industries and millions of households are still reeling from those imposed in the spring during the first viral wave.
Those health risks and the possibility of a long “slog” of slow growth and elevated joblessness means the United States remains at risk of a “recessionary dynamic” where persistent weak growth feeds on itself through successive rounds of layoffs and business failures, Federal Reserve Chair Jerome Powell told a business conference.
Early action from the Fed and the approval by Congress of trillions of dollars in direct aid to companies and families has avoided the worst outcomes “so far,” Powell said.
But “the expansion is still far from complete,” and if U.S. officials grow stingy about further help it “would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Powell said, while in contrast “the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed they will not go to waste. The recovery will be stronger and move faster.”
“These weeks are extremely critical not only for the public health issue but also for consumer confidence and investor confidence,” said European Central Bank executive board member Philip Lane. “We are seeing some resurgence (in the virus) and…some degree of new restrictions…In the near term, there’s no doubt, it’s the case that we need a forceful fiscal response for good macro outcomes.”
Both men delivered their remarks online to a meeting of the National Association for Business Economics, bolstering what has now become a staple message from central bankers: Concerns about high levels of public debt are currently secondary to keeping households and businesses afloat through the record-setting crash in consumption, investment and jobs sparked by the pandemic.
Bank of Japan Governor Haruhiko Kuroda will address the same conference later on Tuesday, at 7 p.m. EDT (2300 GMT).
BETTER TOO MUCH THAN TOO LITTLE
At least in the United States, the rebound from that crash was, at first, stronger than expected – largely because a variety of federal government and Federal Reserve programs “substantially muted the normal recessionary dynamics that occur in a downturn,” with fewer bankruptcies and fewer permanent layoffs than would have occurred otherwise, Powell said.
The record in Europe has been spottier. Goldman Sachs estimates the U.S. economy will contract 3.5% in 2020, while gross domestic product in the euro area will fall by 7.9% – and nations including France, Italy and Spain could see double-digit declines.
But even in the United States, the pace of recovery “has moderated,” from earlier this year and with that slowing comes the risk “that the rapid initial gains from reopening may transition to a longer-than-expected slog back to full recovery,” Powell said.
That sort of prolonged slowing, he warned, could “trigger typical recessionary dynamics as weakness feeds on weakness.
In that situation, he said, officials should risk doing too much for those in need rather than too little, an implicit call on members of Congress and the Trump administration to aim high in their still-stalemated deliberations over how much more to spend on aid for households and businesses. Members of Congress and the Trump administration are negotiating over further fiscal programs of perhaps $2 trillion or more.
The comments mark a slight shift in Powell’s analysis of where the economy stands at a moment when the virus continues to spread and the economy divides between sectors and people doing well and those facing serious trouble. Where his earlier rhetoric focused on building a financial “bridge” to the post-pandemic era, he has now suggested that even a recovery that slips into too low a gear could devolve into a self-fulfilling recession.
“The economy is recovering, but even if we don’t have an immediate double-dip recession, if it’s just a very, very slow recovery, that itself could be problematic,” said Kathy Bostjancic, chief U.S. financial economist with Oxford Economics.
Reporting by Howard Schneider and Balazs Koranyi; Additional reporting by Ann Saphir; Editing by Andrea Ricci