Numerical Context on the Proposed Fiscal Stimulus

In my last blog I wrote about the immediate need for helicopter money and coordinated fiscal stimulus from governments around the world. Since then the US administration announced a $850bn stimulus package. I would like to share some numbers to put the figures being proposed by US political leaders into context.

The GDP of the United States was $21.4 trillion in 2019. This means that on average, the US produced a GDP of $1.8 trillion/month in 2019. Obviously, even with all the measures put in place in response to the coronavirus, we are very far from having shutdown the entire economy. But what percent of the economic output has been impacted by the partial shutdown and economic disruption?

To give us an idea, we can actually use the latest economic data shared by China yesterday. According to the National Bureau of Statistics, industrial output in China tumbled by 13.5% in the first two months of the year. As per the Financial Times, the same data also showed that retail sales plummeted 20.5 per cent year on year in January and February, and fixed asset investment fell 24.5 per cent. Services production also declined by 13 per cent in the first two months, and coupled with the industrial production figure, Capital Economics estimates that Chinese GDP contracted by 13 per cent during the first two months of the year. (Source: Financial Times, Chinese economy suffers record blow from coronavirus.)

However, while the data above suggests a 13 per cent drop over two months, it is important to note that China only went into full lockdown on January 23rd. Considering that February is a shorter month, the contraction primarily corresponds to a period of thirty-seven days. Putting this into monthly terms, a reasonable assumption is that China’s economy contracted by 10.5 per cent on a monthly basis during the lockdown period.

Taking this 10.5 per cent number and applying it to the US monthly GDP of 1.8 trillion, we see that the GDP impact of going into shutdown for one full month is about 190 billion dollars, or close to one percentage point of annual GDP each month the shutdown is in place. This sort of math is of course way too simplified, but it helps give a directional understanding, and it seems to imply that by proposing a $850bn stimulus package the current US administration is looking to make up for about three to four months of lost output from slowing down economic activity in response to the coronavirus.

What the numbers do not take into account is follow on disruptions that may be caused as people lose their jobs or companies have to go out of business permanently. It also does not take into account any disruptions from stress building up in the financial system such as the repo or commercial paper markets. Nonetheless, one can only hope that it will inject markets and people with a sense of stability. The delivery mechanisms will also be key, as the stimulus needs to reach the people and businesses that need it most in an expedient manner.

The most important thing to note here however is that the US is far from the only country impacted by the coronavirus. The GDP of the EU is close to $20 trillion, and their economic output have certainly been exposed to the same sorts of unprecedented shocks. Hence, it will be very important that other governments continue to take similar fiscal measures in the coming days, and do so in a coordinated manner.

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