The US economy contracted at its steepest pace since the Great Depression in the second quarter as the Covid-19 pandemic shattered consumer and business spending, while the German economy showed a worse-than-expected, record contraction.
In the US, gross domestic product (GDP)collapsed at a 32.9 per cent annualised rate last quarter, the deepest decline in output since the government started keeping records in 1947, the Commerce Department said on Thursday.
The drop in GDP was more than triple the previous all-time decline of 10 per cent in the second quarter of 1958. The economy contracted at a 5 per cent pace in the first quarter.
The bulk of the historic tumble in GDP occurred in April when activity almost ground to a halt after restaurants, bars and factories among others were shuttered in mid-March to slow the spread of the coronavirus.
Though activity picked up starting in May, momentum has slowed amid a resurgence in new cases of the illness, especially in the densely populated south and west regions where authorities in hard-hit areas are closing businesses again or pausing reopenings. That has tempered hopes of a sharp rebound in growth in the third quarter.
Meanwhile, the 10.1 per cent decline in German economy in the second quarter was its steepest plunge on record. The contraction, which was worse than the 9 per cent predicted by Reuters economists, wiped out nearly 10 years of economic growth.
“The drop was even harsher, more pronounced than expected, which is something that is also being reflected by the market,” said DZ Bank strategist Daniel Lenz.
“There has been a lot of optimism in the spring with corona numbers going down and some early indicators going up. Now, with this very weak reading of German GDP numbers... [there is an] expectation that maybe some of the other European readings will be even worse,” he said, referring to the likes of Italy and Spain.
US Federal Reserve chair Jerome Powell on Wednesday acknowledged the slowdown in activity. The central bank kept interest rates near zero and pledged to continue pumping money into the economy.
"The bottom fell out of the [US] economy in the second quarter," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. "The outlook is not very good. Americans are not behaving well in terms of social distancing, the infection rate is unacceptably high and that means economic growth cannot gain any traction."
The plunge in GDP and faltering recovery could put pressure on the White House and Congress to agree on a second stimulus package.
US president Donald Trump, whose opinion poll numbers have tanked as he struggles to manage the pandemic, economic crisis and protests over racial injustice three months before the November 3rd election, said on Wednesday he was in no hurry.
Economists say without the historic fiscal package of nearly $3 trillion, the economic contraction would have been deeper. The package offered companies help paying wages and gave millions of unemployed Americans a weekly $600 supplement, which expires on Saturday. Many companies have exhausted their loans.
This, together with the sky-rocketing coronavirus infections, is keeping layoffs elevated. In a separate report on Thursday, the Labour Department said initial claims for unemployment benefits totalled 1.434 million in the week ending July 25th.