The U.S. economy is facing the worst contraction in modern history — and a “confidence shock” will make the recovery slow, says one economist.
Frances Donald, head of macro strategy at Manulife, predicts GDP this quarter could shrink by a whopping 20% amid the coronavirus pandemic.
“We are going to see, without hyperbole, the worst economic contraction in modern economic history. It will be likely double digits,” Donald told Yahoo Finance. “We are not looking for growth to come back online really until the fourth quarter of this year.”
The latest jobless claims show more than 4.4 million Americans filed for first time unemployment last week. Since the spread of the outbreak, more than 26 million Americans have filed for unemployment insurance as companies big and small have laid off or furloughed employees and shuttered commerce.
“What worries me as an economist is that we can give people their jobs back when we turn the economy back on. Not all of them but some,” she says. “But there is a confidence shock at play here. Are we going to be able to make these workers who lost their job whole? Probably not.”
‘Sizable confidence shock’
Donald says individual behaviors will make it hard for the economy to bounce back quickly once states re-open.
“We’re dealing with a sizable confidence shock, a size-able financial hit that is not going to be easy to unwind,” said Donald. “I think this is going to have a permanent stain on the way that Americans think, the way they behave, the way they save in this future.”
Some sectors will take longer to come back than others.
“It’s a lot easier to press a button and put a manufacturing plant back online, so you might see a V-shaped recovery in manufacturing and construction” said Donald. “But for services, for confidence that flows through into the things that you and I buy on a day to day basis, that’s going to take a lot longer.”
Still, Donald predicts 1%-2% growth for the next several years. She says federal, state and local governments may be able to provide boosts in the years ahead.
“If we do see large-scale infrastructure spending, if we do see productivity boosts, then we might actually be able to break out of this slow-growth environment come three, four years from now,” says Donald.
“But the next couple of years are going to be marked by deflationary concern, slow spending, high savings rates,” she added.
Ines covers the US stock market from the floor of the New York Exchange. Follow her on Twitter at @inesreports.