A Coronavirus Recession?

April 7, 2020

The COVID-19 pandemic is unraveling the economy nationally and globally as most of the world moves toward a lockdown that entails the closure of significant portions of both the service and manufacturing industries. Staying at home may be safer than going to work but it is creating a disastrous situation for the economy. The lack of global leadership to push for international coordination is very telling, and the lack of consistent US policy will make the impact on economic growth dramatic. We are seeing projections that annualized gross domestic product will drop as much as 38 percent in the second quarter and 5.5 percent for the year. The economic disaster is almost unfathomable.

 

As US unemployment rocketed up by 10 million, we have seen demand for goods collapsing. Exports from China on ships have nowhere to go and laden containers are ending up in temporary storage. As parts of Europe and Asia have shut down their manufacturing industries, production of goods has come to a near standstill, although China’s official Purchasing Managers Index suggests that industrial output there is ramping up once more. The auto industry has for all intents and purposes ceased production. Shipping lines are canceling sailings with capacity cuts of 20 percent or more on the transpacific route. Europe is worst hit as business activity collapsed in March with indicators such as the PMI dropping into unchartered territory. That is an indication of what to expect in the coming weeks in the US economy and trade.

 

Our projections for 2020 are down by at least 10 percent from last year, which was already marginally down from 2018. The largest drop is forecast for the first half of this year but with uncertainty about the length of the lockdown and extent of the pandemic, the second half may not be in better shape and could result in a larger downturn for the year. Sadly, the unknown is not easy to model.

 

As the world shuts its doors the question is what will be the long-term effect? Possibly a shift to greater national production of goods aided by automation to keep the cost manageable: not an end to globalization but certainly a shift to increased nationalism. The move to create more distributed supply chains that was already underway will no doubt also increase in pace.

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