Part 2 : What impact is the crisis having?
The main challenge for the authorities at the moment is to prevent the health crisis from having a lasting impact on the economy. This would be the case if production capacity was destroyed through bankruptcies or layoffs, if capital stock fell due to lower investment expenditure, or if economic agents became more cautious in a bid to repair damaged balance sheets. For the time being, the economy’s capacity to rebound seems to have been preserved.
Bankruptcies are at very low levels both in the United States and in France. While the number will no doubt rise, public authorities can be expected to provide support. The unemployment picture is also reassuring. In Europe, unemployment has remained well below the levels that prevailed after the 2008-09 financial crisis, thanks in particular to the strengthening of short-time working measures. In the United States, unemployment has fallen sharply from its initial abrupt rise.
Business investment is proving resilient, with capital goods orders rebounding strongly from their spring lows and investment intentions on the right track. While corporate financial positions do not seem to have deteriorated much, there are significant disparities between countries and sectors.
Household finances have been protected thanks to massive social transfers, particularly in the United States, where the response to the crisis has been extraordinarily strong. Transfers already received by US households have largely exceeded earnings losses and are increasing the forced savings that are a result of lower consumption. The bulk of these transfers is currently being kept as deposits and reducing net debt by the same amount. These large transfers have meant the least wealthy households have seen their net wealth increase sharply, more than outstripping the positive wealth effect for affluent households. Ironically, American households are now financially better-off than they were before the health crisis.
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The opinion expressed above is dated January 2021 and is liable to change. Latest available data as of publication date.
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