Skip to main content

Virus Could Drag US GDP to -13%, Spike Jobless Rate to 9%: IHS

As the coronavirus cuts through the U.S. economy, IHS Markit warned on Friday that second-quarter gross domestic product (GDP) will plunge to negative 13 percent.

Joel Prakken, chief U.S. Economist at IHS Markit, forecast GDP to contract 1.7 percent in 2020 year over year, while unemployment approaches 9 percent by December and inflation slips to 1.3 percent in 2021.

“In this forecast update, recovery from the looming economic contraction begins in August, by which time we expect the rate of new cases of coronavirus disease 2019 to be dwindling, and quarantines, official and self-imposed, to be lifting,” Prakken said. “It is not until the fourth quarter that a firm rebound takes hold. GDP growth in 2021 is projected at 3.8 percent year over year, but the economy does not regain full employment until 2023. By the end of that year, the stocks in the S&P 500 Index recoup recent losses.”

Projecting growth outside the U.S., IHS country analysts see foreign GDP declines of 0.2 percent in 2020 measured year over year, as most countries are projected to fall into recession. This also means downward revisions to for U.S. exports.

In the energy sector, near-term projections for oil prices are for the price of Brent crude dropping to nearly $11 per barrel in the second quarter before starting to rebound. Falling gasoline prices provide only a partial near-term offset to this collapse in energy-related investment spending, Prakken said.

As for consumer spending, he said IHS has “deepened and accelerated our assumed ‘shocks’ to components of consumer spending at risk to policies of social distancing, with declines by April of between 40 percent and 90 percent in transportation, entertainment, gambling, lodging, food away from home, and travel, with no recovery until August and full recovery not until June 2021.”

Related Stories

Personal consumption expenditures are seen falling at a 16 percent annual rate in the second quarter before rebounding strongly in the fourth quarter.

At this time, Prakken said the forecast, which is likely to worsen, is for 7 million jobs to be lost in the second quarter, with the unemployment rate rising to 8.8 percent by the fourth quarter.

Discussing federal emergency-relief packages, Prakken said the current assumption is for one-time cash disbursements of $500 billion to individuals during the second quarter. However, most of these payments will go to people who remain employed and therefore likely will be saved.

“The rest will go to people who become unemployed and we assume they spend all of it over several quarters,” Prakken said. “The resulting stimulus boosts second quarter GDP growth by less than a percentage point. The federal deficit spikes to nearly $3.5 trillion at an annual rate in the second quarter and rises to $1.8 trillion for this fiscal year. Because most of the cash disbursement is saved, the personal saving rate temporarily spikes to 21 percent in the second quarter.”

“Our forecast assumes that the shock to the level of consumer spending traces out a steep drop in March and April, a flat valley through July, and a gradual recovery from August to June of 2021…a hockey stick, or perhaps the Nike ‘swoosh,’” Prakken said. “Yet even that delayed and subdued recovery implies quite aggressive GDP growth rates in the fourth quarter of this year (6 percent) and the first quarter of next year (8 percent) before growth slows back closer to trend by the end of next year.”

Looking at the overall economic costs of the COVID-19 pandemic, IHS Markit estimates that over the next five years, the pandemic will cost the economy $1.5 trillion in foregone GDP. In addition, a recession casts a shadow on potential output, which remains slightly below the pre-virus path for several years after 2024.

“Hence, the cost of the pandemic continues to rise even after the economy regains full employment, albeit at a much slower pace than during the recession itself,” he added.