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This Economist Projects 3 Quarters Of GDP Contraction In Coronavirus Recession

This Economist Projects 3 Quarters Of GDP Contraction In Coronavirus Recession

As analysts and economists take stock of the degree of damage the COVID-19 pandemic is likely to inflict on the economy, an economist at BofA Securities said the ensuing recession is poised to "take the crown."

Record Recession Forecasted

The recession resulting from the pandemic is likely to be deeper and more prolonged, not just in the U.S. but globally as well, BofA's U.S. economist Michelle Meyer said in a Thursday note.

The economist estimates GDP will contract for three consecutive quarters until the third quarter. The U.S. economy is expected to shrink 7% at a quarter-over-quarter, seasonally adjusted annual rate in the first quarter, 30% in the second quarter and 1% in the third quarter, she said. 

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How Various Components of GDP Could Fare

The first quarter will be hurt by a severe decline in consumer spending in the second half of March, enough to push the quarter into contraction, Meyer said. 

The weakness in consumer spending is likely to broaden in April, with Meyer estimating a 40% drop in spending in the second quarter. 

The economist also said the sharp rise in unemployment insurance claims conjures up the scenario of income loss and impairment of consumer spending.

The weakness will further be exacerbated by a decline in business investment, according to BofA. 

While consumer spending is projected to limp back to normalcy and turn positive in the third quarter as the economy opens up, there is likely to be further contraction in business and residential investment, Meyer said.

There will be additional inventory contraction amid impaired supply chains and frictions in production, she said. 

Meyers said she expects the unemployment rate to peak at 15.6%.

"We forecast the cumulative decline in GDP to be 10.4% and this will be the deepest recession on record, nearly five times more severe than the post-war average." 

Light At the End of Tunnel

BofA does see a recovery on the other side. After solving the public health crisis and stopping the spread of the pandemic, the next step is to slowly open the economy, with businesses returning and people going back to work, Meyer said. 

This will unleash pent-up demand, leading to a 30% pop in fourth-quarter GDP, she said. 

"Nonetheless, we think this will be a slow recovery overall as many workers will be displaced and businesses adapt to a period of lost revenue." 

Related Links:

Will The COVID-19 Economic Shutdown Teach Americans To Save More Money?

Jobless Claims And The Likely Collapse Of Volumes – FreightWaves NOW


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