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The US economy showed the largest decline in 10 years due to coronavirus: what's next

The US economy has largely stalled due to the coronavirus pandemic, showing worse results for more than a decade in the first quarter of 2020, but gloomy results reflect only a small part of the impending damage, writes USA Today.

Photo: Shutterstock

The country's gross domestic product (the value of all goods and services produced in the United States) declined 4,8% year-on-year from January to March, as consumer and business expenses plummeted, the Department said Wednesday. US trade. This was the first fall since the beginning of 2014 and the steepest since the end of 2008, the period of the deep Great Recession.

Economists surveyed by Bloomberg predicted a 3,8% decline in GDP. The country is almost certainly already mired in a deep, albeit probably short, recession, the newspaper notes.

The decline in the first quarter most likely reflects only part of the actual decline, as initial estimates tend to miss some data, and such gaps widen during major economic shifts, investors at Goldman Sachs are convinced.

In the first quarter, the economy ran smoothly until, in mid-March, most states began closing “nonessential businesses” such as restaurants, malls, movie theaters and gyms to curb the spread of the virus. The business closures have exacerbated the problem, which also affected the travel industry, which almost came to a standstill when Americans stopped flying and staying in hotels.

According to Moody's Analytics, about 30% of the US economy is closed. About 10 million Americans in industries lost their jobs directly and indirectly in March, further reducing consumer spending in the first quarter.

By May, up to 25 million Americans will be laid off, and about 20 million more will face reduced working hours or wages, Moody's estimates. The unemployment rate, which rose from a half-century low of 3,5% in February to 4,4% in March, is expected to rise to 15-20% in April, the highest since the Great Depression.

On the subject: Coronavirus leads the world to the worst crisis in 100 years: forecast of IMF chief economist

As a result, most of the economic consequences of dismissals and closures will end in the current quarter. Economic growth is expected to decline by 24,5% year on year, according to economists surveyed by Wolters Kluwer's Blue Chip Economic Indicators. Research firms such as Nomura expect a drop of 40%, the largest since the 19th century.

Congress has given out about $ 3 trillion in harm reduction programs. Among other measures, lawmakers increased unemployment benefits and offered soft loans that cover 8 weeks of wages and other expenses for enterprises with less than 500 employees. The Federal Reserve has also launched a program package to support lending to enterprises and households.

Analysts, in turn, expect the economy to begin to recover by summer, assuming that the outbreak of coronavirus continues to decline, and more and more states are allowing businesses to reopen. States such as Georgia, South Carolina, and Tennessee are already restarting their economies.

Economists surveyed by Wolters Kluwer expect the economy to grow by about 7,5% in the second half of the year and by 2021% in 3,8. Regardless, many consumers are expected to be wary of avoiding gathering places until a vaccine is available, perhaps a year from now. Economists surveyed do not expect the economy to return to its pandemic level by the end of 2021.

Consumer spending plummeted

Consumer spending fell 7,6% - the largest drop in 40 years - after rising 1,8% in the fourth quarter. American buyers were in good financial shape before the coronavirus outbreak. But the sudden closure of most consumer service businesses, coupled with millions of layoffs, has drastically cut purchases. Consumer confidence, which could herald spending, plummeted in April to its lowest level since 2014. Consumption accounts for about 70% of economic activity.

Business investment is plummeting

Business investment fell 8,6% after falling 2,4% in the fourth quarter, which is the first indicator since 2009, when such expenses were reduced for four consecutive quarters. Company spending was already limited amid President Trump's trade war with China last year.

Any increased optimism following the Phase 1 trade agreement between the US and China in January was stifled by a pandemic. There is no reason for enterprises to buy new factory equipment and computers in order to increase production if consumers do not spend money. Purchases of such equipment fell 15,2%, while construction costs fell 9,7%, in part due to a drop in oil prices, which prompted manufacturers to close drilling rigs.

Business in no hurry to stockpile

Companies increased stocks at a much slower pace. At the beginning of 2019, many firms increased their stocks, trying to avoid Trump tariffs on Chinese imports, reducing the need to replenish these supplies. Coronavirus further weakened accumulation, significantly reducing consumer demand. Stocks hinder growth for four consecutive quarters.

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Investing in residential real estate is growing

Construction of new single-family homes and apartments, as well as repairs, grew by 21% after a 6,5% increase in the previous quarter. Average 30-year fixed mortgage rates fell to 3,3% from 4,2% a year ago, which led to purchases and housing construction. This helped to compensate for the shortage of labor and free sites. But house construction is expected to fall in the coming months due to a pandemic.

Trade growth slowed down

US exports fell 8,7%, but imports fell nearly twice as fast - 15,3% - due to supply chain disruptions in China and weaker demand from American consumers.

Government spending rose

Federal, state and local spending increased 0,7% after a 2,5% increase in the fourth quarter. Federal spending rose 1,7% and should be a much more significant growth factor in the second quarter in light of the massive spending on federal aid for coronavirus.

conclusions

It was a bleak report, but it simply reflected the early fallout from the pandemic, with the worst damage expected in the current quarter. In a recession, the economy is likely to contract 12% - three times the decline during the Great Recession, according to Oxford economist Gregory Daco.

However, this recession lasted 18 months, while the current recession is expected to cause damage in the first half of the year before recovery begins in the third quarter.

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