WASHINGTON—The COVID-19 pandemic is pushing the world into the worst downturn since the Great Depression. Large parts of economic activity have come to a standstill as many nations and cities are in lockdown to contain the spread of the deadly virus.
Many believe today’s situation defies comparison with any past experience. As the CCP virus moves through the United States, economists are forced to change their forecasts frequently to reflect the latest data.
“Honestly, I am running out of adjectives to describe this economic disaster unfolding at lightning speed,” Scott Anderson, chief economist at Bank of the West in San Francisco, wrote in a note to clients.
“Economic models are incapable of forecasting what comes next, since we have never seen anything like it in the post-war period on which economist models are trained. Policymakers are literally flying blind and making things up as they go along.”
The surge in jobless claims and other economic data over the past few weeks have started to show the broad impact of the crisis on the U.S. economy.
Many of the top banks now project a more than 30 percent hit to the economy in the second quarter ending June 30.
Goldman Sachs, for example, revised its forecast for the second quarter after “sky-high jobless claims” in March. The bank now expects the U.S. gross domestic product (GDP) to fall 34 percent on a quarter-on-quarter annualized basis, after originally forecasting a 24 percent contraction.
Deutsche Bank similarly predicts a 33 percent decline in the second quarter and states this is “more than three times the largest quarterly decline in the modern era.” The largest contractions observed in the past were 10 percent in 1958 and 8.4 percent in the fourth quarter of 2008.
Economists at Deutsche Bank, however, predict that the depth of expected contraction will be substantively higher in large economies across Europe.
JPMorgan issued last week an even more dire forecast for the U.S. economy, saying that the second quarter will see a 40 percent hit.
U.S. jobless claims have totaled almost 17 million in just three weeks; and JPMorgan economists believe April’s unemployment rate will surge to 20 percent, with 25 million jobs lost.
The pandemic led to the largest global monetary and fiscal policy response in history, involving dozens of major governments globally.
“With $2.8 trillion already announced, the U.S. fiscal response at 13 percent of GDP is the largest ever,” a Deutsche Bank report stated, adding that other major economies also announced fiscal stimulus in the range of 2 to 11 percent of their GDPs.
Policymakers around the world continue to roll out stimulus packages using a wide range of tools to provide liquidity to the corporate sector and financial relief to individuals.
A Silver Lining
Many economists are optimistic for a quick recovery once the CCP virus, often called the novel coronavirus, pandemic fades. While the shock is larger than the financial crisis of 2008 in terms of speed and magnitude, they believe the bounce back should be much more rapid.
“The origins of this shock are not balance sheet driven as in 2008, but rather, are more income-based through a demand shock,” stated the Deutsche report.
Federal Reserve Chairman Jerome Powell echoed similar optimism on April 9.
“There is every reason to believe that the economic rebound, when it comes, can be robust,” Powell said in a video conference hosted by the Brookings Institution. “We entered this turbulent period on a strong economic footing, and that should help support the recovery.”
The uncertainty surrounding the pandemic led to sharp sell-offs initially on Wall Street and disrupted the longest bull-market expansion in history.
From Feb. 21 to March 23, the Dow Jones Industrial Average plunged by 36 percent into a bear market. Then the index rallied by 26 percent during the last three weeks “on investor optimism about decelerating viral spread coupled with unprecedented monetary and fiscal policy actions,” according to David Kostin, chief U.S. equity strategist at Goldman Sachs.
“A sharp economic recovery is currently priced into the U.S. stock market,” he said in his recent report.
Goldman Sachs predicts that there will be a strong rebound in the second half of the year, with 19 percent growth in the third quarter followed by 12 percent in the last quarter of the year.
The bank predicts that the overall U.S. GDP will contract by 6.2 percent annually in 2020 and will grow by 5.5 percent next year.
China’s economic activity is predicted to be at a 44-year low, and it might be worse than predicted, as many export-oriented Chinese factories are shuttered, with the pandemic weighing on global demand.
The International Monetary Fund (IMF) calls the current crisis the “Great Lockdown” and says it will be the worst economic downturn since the Great Depression.
IMF’s World Economic Outlook report now projects global economy in 2020 to contract by 3 percent, a significant downgrade from 3.3 percent growth predicted in January.
This substantial revision over a very short period makes the Great Lockdown far worse than the financial crisis of 2008, according to IMF’s chief economist Gita Gopinath.
“The cumulative loss of global GDP over 2020 and 2021 from the pandemic crisis could be around $9 trillion, greater than the economies of Japan and Germany combined,” she said at a virtual press conference on April 14.
“Now this is a truly global crisis, as no country is spared. Countries reliant on tourism, travel, and entertainment for their growth are experiencing major disruptions.”
The IMF projects U.S. GDP to contract by 5.9 percent in 2020 before it rebounds to 4.7 percent growth in 2021. It also expects the world economy to recover next year, growing by 5.8 percent.
Much worse growth outcomes are possible, the IMF stated, if the pandemic and containment measures last longer.
This recession, however, will not be as devastating as the Great Depression. Gopinath said the magnitude of the collapse was much worse during the Great Depression, which began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced, with a contraction of about 10 percent globally, according to the IMF.
Economists believe most developed nations are expected to recover in the second half of the year, but the economic shocks in the less developed world would last longer. IMF urged official creditors to provide debt relief to the poorest countries that have high levels of debt burden.