WSJ Survey: Coronavirus to Trigger U.S. Economic Contraction in Second Quarter

Economists polled by The Wall Street Journal see ‘significant drag’ on 2020 U.S. growth, greater chance for recession

Economists sharply cut forecasts for the U.S. economy this year, predicting it will contract in the second quarter and raising expectations for a recession as the coronavirus spread around the world. Those economists, polled in this month’s Wall Street Journal survey, also expect additional interest-rate cuts by the Federal Reserve in the weeks and months ahead, amid market volatility and uncertainty surrounding the new coronavirus pandemic.

The survey was concluded before President Trump late Wednesday announced a 30-day ban on travel from Europe into the U.S. and said he would take action to offer financial assistance to those affected by the coronavirus pandemic.

Business and academic economists in the survey now expect, on average, gross domestic product to contract 0.1% at an annual rate in the second quarter. That is a large downgrade from February, when they still expected GDP growth of 1.9% from April to June.

The monthly survey of economists found 75% of economists expect the coronavirus spread to be a “significant drag” on full-year economic growth in 2020, shaving more than 0.5 percentage point from growth as measured from the fourth quarter of the prior year.

“The fast-spreading coronavirus outbreak and its accompanying fear factor are hitting travel, curtailing consumer and business demand and disrupting global and U.S. supply chains. With markets amplifying the hit, the drag will likely surpass 0.5 percentage point,” Gregory Daco, chief U.S. economist at Oxford Economics said.

Some 41% of economists expected the coronavirus pandemic will also have a significant impact on U.S. gross domestic product growth in the first quarter, which ends March 31. That is up from 5% in last month’s survey.

Economists now see growth in the first quarter at 1.3%, down from 1.6% in February. In the third quarter, the economy is expected to expand 1.2%, down from a forecast of 2% in February.

For the full year, measured from the fourth quarter of 2019 to the fourth quarter of 2020, economists expect growth of 1.2%, down from 1.9% last month. Full-year growth was 2.3% in 2019.

“Financial stress is cascading now and unless the virus magically stops spreading, that stress will last for long enough to impact the real economy,” said Constance Hunter, chief economist at KPMG. Ms. Hunter expects the shape of the economy as it recovers from the coronavirus pandemic is more likely to be U-shaped—with a prolonged bottom—than the V-shaped recovery she initially hoped would be the case.

Still, the economy is expected to grow in the first and third quarters of this year, suggesting the U.S. will avoid a recession, defined as two or more consecutive quarters of contraction.

“We’ll see a sharp contraction in the second quarter. We should recover solidly in the third quarter but that’s at the mercy of the virus situation at that time,” said Russell Price, chief economist for Ameriprise Financial.

Economists see the odds of a recession in the next 12 months as a coin toss. They assigned a 49% probability of a recession in the next year, compared with 26% a month ago.

The “combination of demand and supply-side shocks from Covid-19 certainly raises the risks,” said Thomas Kevin Swift, chief economist at the American Chemistry Council.

Economists overwhelmingly expect the Fed to respond to the coronavirus pandemic by further lowering interest rates: 94.4% of economists project the central bank’s next move will be a rate cut, with 77.8% forecasting a move at the Fed’s meeting next week, March 17-18. Some 20.4% of economists expect a move at the April 28-29 gathering. In the February survey, only 55% of economists believed the Fed’s next move to be a decrease.

The Fed earlier this month made an emergency half-percentage-point rate cut, reducing the federal-funds rate to a range between 1% and 1.25% in the first rate change in between scheduled Fed policy meetings since the 2008 financial crisis.

On average, economists see the fed-funds rate at 0.5% in June of this year.

Economists this month assigned a 54% probability that the Fed’s benchmark interest rate will return to the zero lower bound by the end of this year.

The Journal surveyed 55 economists from March 6 to March 10, though not every economist answered every question.