GDP May Slow Down In 2020 Due to Effects of COVID19

The first quarter of 2019 was marked by considerable strength, but ever since, the pace of the real gross domestic product has seen some modest slow down rate. While the labor market remains healthy, as the number of job openings continues to outpace the number of unemployed people the same cannot be said of inflation in the country. By contrast, inflation (measured by the all-items personal consumption expenditure price index (PCEPI) has remained relatively low. All through September of 2019, the inflation rate was 0.5 percent below the 2% inflation target of the Federal Open Market Committee (FOMC).

Although the economy is exhibiting some trend-like growth, many businesses in the country continue to face brisk headwinds related to the trade tensions with China and slowing global growth. The FOMC in response to this situation reduced the federal fund’s target range by about 75 basis points in 2019. But still, at the time, the general consensus of professional forecasters is that the GDP would dip below 2% in 2020 and that the inflation would modestly move closer to the Fed’s targeted rate. Leave alone the tussle between China and the U.S, what the Fed did not count on is the Corona Virus!

Back in 2018, the GDP slowed to a three year low in the fourth quarter, and everyone started talking about the possibility of a recession. Well, this year, a remix of the same could be happening sooner. The GDP growth in the first quarter of 2020 will probably slow down to 1.5% from 2.1% in the last quarter of 2019. This will be the weakest pace since 1.1% at the end of 2018. For the rest of 2020, GDPs growth will most likely average at or above 2% if the Coronavirus does take an unexpected turn.

“The risks just keep on coming,” the report said. “The emergence of a novel coronavirus out of China introduces new uncertainty.”

The feds are expecting an economic slowdown, characterized by a contraction of two consecutive quarters of GDP. I don’t think this will still be enough to prompt the FOMC to cut the lending rate that’s used as a benchmark for the investors in bonds including the mortgage-backed securities. But, this is the Fed we are talking about, anything can happen.

“The virus’ emergence and lengths being taken to curb its spread increase the chance the Fed will need to become more supportive in the coming months,” the forecast said, referring to the partial shutdown of the Chinese economy ordered by authorities trying to contain the spread of the coronavirus. “If the virus is not contained, we would expect the FOMC to cut rates again.”

“With the virus occurring around the time of the Chinese Lunar New Year, a time of the year when travel to and from China is elevated and consumer spending is most prevalent, concerns over the impact on the Chinese economy have grown,” the Wells Fargo economists said. “Factory closures have been extended beyond the Lunar New Year holiday, generating disruptions to global supply chains, while travel within and from China has been curtailed.”

Remember the SAR outbreak in 2003? Well, it chilled out the global economy and some similar effects might be experienced if the situation gets out of hand. China accounted for about 4% of the world’s GDP, today, China’s economy has expanded to about 17%.

But, if the contraction in China’s economy happens, it might help the U.S economy in a way- improvement in the U.S. prices for Gasoline. When people save their expenditure on gasoline, they tend to spend that money on other things that account for about 70% of the U.S. GDP.

“Real consumer spending in the first quarter should get a lift from lower gas prices as China’s weaker growth outlook has sent oil prices to the lowest level in over a year,” the economists said.

So far, economists are seeing an impact of Covid-19 on travel, there isn’t a huge impact on economic growth from Corona Virus which has infected, at the time of publishing this article, about 77,925 people. Though it is too early to tell, it may some impact, but it is still difficult to quantify its impact.

“We’ve got the hit from Boeing coming and the uncertainty is how much of a blow will the coronavirus have on manufacturing. How much of a direct impact will it have on demand in China and the spillover effect for the rest of the world? It looks like we’ll get less than 2% growth in the first quarter.,” said Diane Swonk, chief economist at Grant Thornton. “The problem is how much below 2% is in the mostly unknown parts of the equation.” She said clearly the virus will have some impact on the service sector in the U.S., since airlines are already cutting back on flights and people are curtailing travel.

 

Sources and Works Cited

https://www.cnbc.com/2020/01/30/economic-growth-looks-even-weaker-this-quarter-with-virus-now-a-wild-card.html

https://www.housingwire.com/articles/gdp-may-slow-to-1-5-in-2020s-first-quarter/

https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2019/forecasters-see-lower-gdp-growth-2020

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