Macro insights

Policy is vital to support slow recovery

Global second quarter GDP releases illustrated the unprecedented drop in output resulting from the Covid-19 shock and sudden stop in economic activity. Yet the reports are backward looking and only tell part of the story. The cumulative loss of GDP is still on track to be much smaller than that caused by the Global Financial Crisis (GFC), but the recovery will still take time. Policy support to cushion the shock – especially in the labor market – remains key.

The importance of fiscal stimulus can be seen within the U.S. GDP report. U.S. real personal disposable income grew at a record 44.9% annual rate in the second quarter. Yet this was entirely due to fiscal transfers, primarily stimulus payments and unemployment insurance. Stripping those out, real disposable income fell by 22.3% – a record contraction.

Policy support is also evident in the labor market. Across all economies, the share of workers either unemployed or on some form of short-time work scheme remains well above pre-Covid rates. See the chart below. 

Sources: Source: BlackRock Investment Institute, U.S. Bureau of Labor Statistics, the UK Office of National Statistics, Eurostat, the French Statistical Office for Labor and Employment, the Spanish labor ministry, the Italian labor ministry and Autor et al (2020), using data from Haver Analytics. Notes: Latest estimates relate to June 2020, except for the UK for which data only available to May. Official estimates of workers covered by the U.S. PPP scheme are not publicly available, so the yellow bar uses an estimate published by Autor et al, relating to the share of workers still covered by the PPP scheme in June. This is the only available estimate of the impact of the PPP program on employment.

The increase in the U.S. unemployment rate since March has far outstripped that in Europe. But most of the unemployment in the U.S. is still classified as temporary. This should help to curb some of the long-term damage as activity restarts and workers return to their jobs. Yet these unemployed people are not protected from the sharp cliff in unemployment insurance payments that has resulted from the recent expiry of the federal top up. Even if the top-up is extended, households need to bridge a temporary gap in income. And new academic estimates suggest that only a small share of workers are still protected by Paycheck Protection Program loans, which are also due to close for new applications this month. This uncertainty around the continuation of the income support measures will likely take a toll on the U.S. consumer. 

In Europe, short-time work programs are giving workers more protection in the short run by keeping them attached to their jobs – and at a typical replacement rate of 70-80% of wages. There is no imminent cliff edge. Take-up of these programs dropped in June as European economies started to reopen, but the elevated share of workers still covered underscores how much of a cushion labor market policies have provided during the Covid-19 shock.