The economy is recovering following the sharp fall in GDP and dramatic rise in the unemployment rate in the first half of 2020. Real GDP is anticipated to contract by 3.7% in 2020, before rising by 3.2% in 2021 and 3.5% in 2022. The unemployment rate will gradually fall, but will remain elevated compared with the pre-pandemic period. This reflects activity in some sectors, such as hospitality and transportation, continuing to be impacted by the pandemic and impediments to cross-sectoral labour reallocation. A general rollout of an effective vaccine in the latter half of 2021 will allow an easing of containment measures and strengthen confidence.
Massive monetary and fiscal responses have protected households and businesses. However, in the absence of a new substantial fiscal stimulus programme, a severe fiscal cliff would result in a rapid withdrawal of support to households, massive layoffs and a wave of bankruptcies (this is assumed to be avoided in the projection). Some state and local governments will require federal government financial assistance given a sharp drop in consumption and travel-related tax receipts. Structural reforms to promote productivity-enhancing labour reallocation should also be prioritised. For example, restrictive land use regulations should be relaxed to promote the supply of new housing and the ability for workers to move to new job opportunities. Similarly, reforming the occupational licensing system and the use of non-compete agreements in work contracts would promote labour mobility and wage growth.
The longest expansion on record came to a juddering halt with the worldwide spread of the coronavirus. The containment measures introduced have contributed to the economy suffering one of the largest shocks outside wartime and leading to extremely high unemployment. A rapid and substantial policy response has aimed to shield households and businesses from the worst of this shock. As the economy re-emerges from the shutdown pressures on public finances will be intensified, but policy support should remain available while the economy is operating well below capacity. Sanitary measures remaining in place until the coronavirus is eliminated will weaken an already sluggish productivity growth and population ageing will continue constraining the available labour supply. The government should therefore continue to focus on structural reforms liberalising productive forces, especially by removing regulatory barriers that stand in the way of boosting productivity. Helping Americans go back into employment and acquire the skills needed to take advantage of new job opportunities will also support the return of the high levels of prosperity American’s have enjoyed in the past.