Economic Inertia to Drag On But Recovery is Forecast: Economists

Poll shows economists believe a 'U-shaped' recession most likely
April 22, 2020 Updated: April 22, 2020

A Reuters poll found recently that most economists believe the U.S. economy is most likely headed for a “U-shaped” recovery, although the economic recession caused by the CCP (Chinese Communist Party) virus—commonly known as the novel coronavirus—is expected to be more severe than previously thought.

The CCP virus has infected an estimated 2.5 million people worldwide, with over 170,000 recorded deaths. Lockdowns across the United States have shuttered schools, retail outlets, restaurants, and entire industries across the country, causing enormous economic losses and a drop in demand for products and services.

Measures taken thus far by the U.S. Federal Reserve to counter the crisis have included reducing interest rates to zero and purchasing unlimited amounts of financial assets, such as U.S. government bonds and mortgage-backed securities.

Bloomberg reported this week that the Fed may be purchasing over $40 billion worth of such assets each day.

According to the Reuters poll, such purchases will explode the Fed’s balance sheet to over $10 trillion in 2020.

The federal government will also spend an additional $2.3 trillion to combat the CCP virus-induced crisis—though more spending may yet be approved.

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U.S. Federal Reserve balance sheet development, 2007 – 2021. (Federal Reserve and Reuters Polls, Reuters Graphics)

Economists Increasingly Pessimistic

The Reuters poll was conducted between April 15 to 20, which was before the price of West Texas Intermediate (WTI) crude oil turned negative on Monday—an unprecedented phenomenon that sent further shock waves through the commodities and financial markets.

Crude oil prices recovered after Monday’s fall, and analysts now expect a new stimulus bill to pass the House of Representatives on Thursday.

The 45 respondents to the poll were economists based in the United States and Europe. Just under half said they expected a U-shaped economic recovery, 10 of them forecast a V-shaped contraction-expansion scenario, seven said the recovery would resemble a more drawn-out tick mark. Five others expect a more volatile, W-shaped, or ‘double-dip’ period of economic uncertainty.

Economists use these and other letters and symbols to describe curves drawn based on key economic data over a specific period.

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U.S. GDP forecast for 2020. (Refinitiv Eikon and Reuters Polls, Reuters Graphics)

With the most prolonged period of economic expansion in U.S. history now at an end, economists have expressed doubt about the country’s growth outlook, slashing forecasts by greater and greater amounts, according to Reuters.

“We’ve never gone through anything like this before,” said Jim O’Sullivan, a chief macroeconomic strategist for the U.S. market at TD Securities. “So anyone who claims to have real expertise in these sorts of issues, I think, is not being honest. Right now, the weakness is pretty dramatic; the economy is weakening pretty sharply.”

“The bottom line is that there is going to be damage, and a lot of firms are not going to survive,” O’Sullivan said. “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.”

Kevin Loane, a senior economist at independent London-based economic analysts Fathom Consulting, said his company’s central expectation is for a rebound in the third and fourth quarters. However, this forecast remains uncertain and carries a range of downside risks.

Risk factors that could derail recovery include long-term lockdowns, another wave of CCP virus cases, business failures resulting in permanent unemployment and wasted capital, and businesses and households continuing to opt to neither spend nor hire.

Over 22 million Americans applied for unemployment benefits over the past month, with the unemployment rate expected to rise to over 13 percent in the coming weeks.