Financial Stress Stemming from COVID-19 May Weaken 2020 GDP Growth Says IHS Markit

IHS Markit economists note that Fourth-quarter GDP growth was reported at 2.1% in the Bureau of Economic Analysis' second estimate, unrevised from the advance estimate. The implications for supply chain managers is obvious, they add.

There were developments in the GDP report that had a bearing on the near-term outlook—fourth-quarter personal income, for example, was revised sharply lower, implying less support for consumer spending—but these developments have been overshadowed by fear and financial stress stemming from continuing spread of the coronavirus disease 2019 (COVID-19).

“The VIX has surged, risk spreads have widened, and equity values have dropped roughly 10% over the last two weeks, wiping out roughly $4 trillion of household net worth, or about $31,000 per household,” said Chief U.S. Economist Joel Prakken.

He also noted that unless reversed fully and quickly, this will weigh on consumer spending over the next few years. More immediately, weakening consumer attitudes will likely slow consumer spending in the second quarter, and businesses are likely to put some investment plans on hold until the outlook clears up.

Following 2.0% growth in the first quarter, we now look for 1.1% GDP growth in the second quarter, followed by 1.9% growth averaged over the rest of 2020. This yields 1.8% growth this year, down from last month's forecast of 2.1% growth.

The Federal Reserve has already cut the funds rate target by 50 basis points in response to growing COVID-19 risks, and we expect another 25-basis-point cut in April. The unemployment rate is likely to begin drifting higher this year, while core consumer price inflation (based on the PCE price index) should remain close to the Fed's 2% objective.

“We are not forecasting a recession, but the risks have risen,” concluded Prakken.

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