The U.S. economic recession underway, caused by the coronavirus pandemic, will be worse than previously thought, with more economists polled by Reuters over the past week expecting a “U-shaped” recovery rather than any other option.
The novel coronavirus has infected nearly 2.5 million people around the world, killed nearly 170,000 and led to lockdowns in many countries, shutting schools, industries and businesses. The United States has the highest infection numbers and deaths among individual nations.
So far, the U.S. Federal Reserve’s policy of zero interest rates and unlimited asset purchases – which will likely expand its balance sheet to $10 trillion this year, according to the poll – as well as $2.3 trillion of federal government spending, have only softened the blow.
In the latest Reuters poll taken April 15-20, before the price of U.S. crude oil fell below zero per barrel on Monday, just under half of 45 respondents based in the U.S. and Europe who answered an additional question said the U.S. economic recovery would be “U” shaped, as represented on a chart tracking economic expansion or deceleration in percentage terms.
Ten said it would be “V” shaped, seven said it would resemble a tick mark, and five said it would be “W” shaped.
But economists, who have spent the last several weeks slashing forecasts by greater and greater amounts, were more doubtful than ever about the country’s growth outlook, now that the longest expansion on record has abruptly ended.
“We’ve never gone through anything like this before. So, anyone who claims to have real expertise in these sort of issues, I think is not being honest. Right now the weakness is pretty dramatic, the economy is weakening pretty sharply,” said Jim O’Sullivan, chief U.S. macro strategist at TD Securities.
“The bottom line is that there is going to be damage and a lot of firms are not going to survive. So no, we’re not going to get back to where we were – and forget getting above that for quite a while. Ultimately, with time and stimulus, the economy will recover, I’m confident of that. But the real question is how long the recovery takes.”
After more than a month of financial turmoil, including the biggest Wall Street crash since 1929, volatility remains high in global markets.
U.S. gross domestic product is now forecast to have contracted 4.8% in the first quarter and will shrink another 30% this quarter, on a seasonally adjusted annualized basis.
In a poll taken just three weeks ago, the median views were for 2.5% contraction in the first, and 20% contraction in the second quarter.
While the poll predicted a 12% rebound in the third quarter and 9% in the fourth, compared with 10.5% and 5.4% in the previous poll, more than 80% of respondents said the risks to their GDP forecasts in the second half of 2020 were skewed more to the downside.
The median 2020 GDP forecast was downgraded to a drop of 4.1% from a 3% contraction three weeks ago, still more optimistic than the International Monetary Fund’s recent prediction for a 5.9% contraction.
For this year, the median worst-case scenario in the Reuters poll was contraction of 10% compared to a decline of 7.3% previously. The economy is now set for a 3.8% rebound in 2021, compared with 3.2% three weeks ago, the poll showed.
Still, economists said the outlook could be far worse and prolonged, depending on the pandemic’s course.
“Our central expectation is for a rebound in the second half of the year; however, that is riddled with uncertainty and downside risks,” said Kevin Loane, senior economist at London-based Fathom Consulting.
“Among these are the risks that: lockdowns are extended longer than currently envisaged, there is a second wave of COVID-19 cases, temporary job losses are made permanent resulting in labor market friction, businesses fail resulting in wasted capital, or businesses and households remain fearful even without official lockdowns and opt not to spend or hire.”
With businesses shut, 22 million Americans have filed for unemployment benefits over the past month. The jobless rate was forecast to soar to 13.7% in the current quarter, coming down to 11% in the third quarter and 8.5% in the fourth.
In the meantime, the Fed’s balance sheet rose to a record $6.42 trillion last week, a little under one-third the size of U.S. GDP before the crisis struck. That jumped from just $4.29 trillion in the first week of March.
It is expected to grow another $3.5 trillion to $10 trillion by the end of this year.
Over the course of its response to the last global financial crisis that began more than a decade ago, the Fed’s balance sheet expanded by a total of nearly $3.6 trillion to peak around $4.5 trillion.
Twenty-three of 36 economists said the Fed was not done yet. They said it may resort to buying exchange-traded equity funds as well as non-government mortgage securities and implementing some form of yield curve control, as the Bank of Japan has been doing for many years.
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Swiss Economy Slumps the Most in Decades – Yahoo Canada Finance
(Bloomberg) — Switzerland’s economy slumped the most in at least four decades as a result of the coronavirus pandemic, with private consumption and investment plummeting.
First-quarter gross domestic product plunged 2.6%, data from the State Secretariat for Economic Affairs showed. That’s worse than the 2.1% hit forecast by economists in a Bloomberg survey and the biggest three-month contraction since the start of the time series in 1980.
Like neighboring France, Italy and Germany, Switzerland responded to the pandemic by winding down much of public life. The hotel and restaurant sector experienced a 23.4% drop in output, according to the data on Wednesday.
Although the Swiss economy fared slightly worse than Germany’s in the first quarter, the contractions in France and Italy were far more severe.
Swiss government subsidies have kept a lid on unemployment and helped companies avoid a cash crunch, but the SECO still expects the economy to shrink 6.7% this year before staging a slow recovery in 2021.
Machine industry group Swissmem said that 80% of its member companies were forced to apply for short-time work, and that the full impact of the pandemic wouldn’t be felt by the sector until the second or third quarter of this year.
To prevent the rallying haven franc from hurting the economy still further, the Swiss National Bank has stepped up the pace of its currency interventions. Its deposit rate is already at a record low of -0.75%.
(Updates detail on hospitality sector in 3rd paragraph)
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Australia Economy Contracts as End to Recession-Free Run Looms – BNNBloomberg.ca
(Bloomberg) — Australia’s economy contracted in the first three months of the year, setting up an end to the nearly 29-year run without a recession as an even deeper slowdown looms for the current quarter.
Gross domestic product fell 0.3% from the final three months of 2019, the first quarterly drop since 2011, compared with a forecast 0.4% decline, statistics bureau data showed in Sydney Wednesday. From a year earlier, it expanded 1.4%, matching estimate
The result sets up an end to Australia’s record run of avoiding two consecutive quarters of negative GDP, having dodged recessions during the 1997 Asian Financial Crisis, the Dot Com Bubble and the 2008 global financial crisis. The current quarter will see a deep contraction, with almost 600,000 jobs lost in April alone and much of the economy in lockdown to contain the coronavirus.
Fiscal and monetary policy are working in tandem to rebuild the economy. The Reserve Bank of Australia has taken the cash rate near zero and lowering the cost of borrowing with its 0.25% bond yield target. The government has injected tens of billions of dollars into the economy to help tide businesses and households through the lockdown.
With the containment of the health crisis allowing activity to resume, how quickly businesses can get back on their feet, workers regain employment and households resume spending is the critical question.
“The rate of new infections has declined significantly and some restrictions have been eased earlier than was previously thought likely,” RBA Governor Philip Lowe said Tuesday after keeping borrowing costs unchanged.
“However, the outlook, including the nature and speed of the expected recovery, remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy,” he said. “In the period immediately ahead, much will depend on the confidence that people and businesses have about the health situation and their own finances.”
©2020 Bloomberg L.P.
Australia’s Economy Contracts, Ending Three-Decade Expansion – Yahoo Canada Finance
(Bloomberg) — Australia’s economy contracted in the first three months of the year, setting up an end to a nearly 29-year run without a recession as an even deeper slowdown looms for the current quarter.
Gross domestic product fell 0.3% from the final three months of 2019, the first quarterly drop since 2011, brought down by a collapse in household spending, statistics bureau data showed in Sydney Wednesday. Economists had forecast a 0.4% drop. From a year earlier, the economy expanded 1.4%, matching estimates.
The Australian dollar edged a little lower after the release, and traded at 69.32 U.S. cents at 1:06 p.m. in Sydney.
The result sets up an end to Australia’s record run of avoiding two consecutive quarters of shrinking GDP, having dodged recessions during the 1997 Asian Financial Crisis, the Dot Com Bubble and the 2008 global financial crisis. The current quarter will see a deep contraction, with almost 600,000 jobs lost in April alone and much of the economy in lockdown to contain the coronavirus.
Treasurer Josh Frydenberg, speaking after the release, accepted this fate when asked directly whether the economy is now in recession.
“The answer to that is yes,” he told reporters. “That is on the basis of the advice that I have from the Treasury Department about where the June quarter is expected to be.”
Fiscal and monetary policy are working in tandem to rebuild the economy. The Reserve Bank of Australia has taken the cash rate near zero and lowered the cost of borrowing with its 0.25% bond yield target. The government has injected tens of billions of dollars into the economy to help tide businesses and households through the lockdown.
With the containment of the health crisis allowing activity to resume, the critical question is how quickly businesses can get back on their feet, workers regain employment and households resume spending.
“Growth should resume in the September quarter, but the impact of COVID-19 will surely cast a long and lingering shadow over the global economy and Australia’s recovery,” said Callam Pickering, an economist at global jobs website Indeed Inc. who previously worked at the central bank. “Continued support from fiscal and monetary policy will be necessary throughout 2020 and beyond.”
Today’s report showed:
Household spending tumbled 1.1%, shaving 0.6 percentage point off GDP, driven by a 2.4% drop in services expenditure. Restrictions particularity impacted spending on travel, hotels, cafes and restaurantsGovernment spending jumped 1.8%, adding 0.3 percentage point. Payments to provide support during the pandemic are expected to rise in the current quarterThe savings ratio advanced to 5.5% from a downwardly revised 3.5% in the fourth quarterDwelling construction fell 1.7%, reflecting continued weakness in approvalsNon-mining business investment fell 1.7%, while mining investment rose 3.6% as miners invest in new technologies and automation
Rising commodity prices are boosting miners’ profitability, with the terms of trade 2.9% higher in the first three months of 2020, pushing the current account surplus to a record A$8.4 billion ($5.8 billion). Yet, miners will be keeping a watchful eye on the nation’s currency, which has surged almost 20% in the past two-and-a-half months.
What Bloomberg’s Economists Say
“Typically backward looking national accounts releases contain an array of hidden trends that are often overlooked. Mining investment has climbed to a 7-year high, Australia’s terms of trade have risen and exploration intentions are elevated. This bodes well for the recovery.”
James McIntyre, economist
The economic outlook is improving as the restrictions are lifted, but will continue to be constrained by closed borders that are hitting tourism and education exports. The government is discussing a fresh round of fiscal stimulus to try to put residential construction back on its feet.
(Updates with Treasurer and economist comments)
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