Stock Market Selloff; Virus Aftermath Not Like A Hurricane – No Roofs Will Be Replinished Even If A Recession Is Avoided; Recovery Is Likely To Be U-Shaped, And Uncomfortably Long

Stock Market Selloff; Virus Aftermath Not Like A Hurricane – No Roofs Will Be Replinished Even If A Recession Is Avoided; Recovery Is Likely To Be U-Shaped, And Uncomfortably Long
 
     The title above is from Justin Lahart’s article, “Virus Aftermath Not Like A Hurricane,” in this weekend’s/March 7/8, 2020 Wall Street Journal. In his Heard On The Street column, Mr. Lahart writes, “when a hurricane rolls in, a river breaches, a levee or suddenly shifting tetonic plates shake the earth, the economy can experience a big hit. The ensuing [economic] recovery is often even bigger.” For Mr. Lahart’s full article, I refer you to this weekend’s WSJ.
     “But. the coronavirusepidemic is no hurricane,” Mr. Lahart reminds us. “It will weigh on the U.S. and the global economy far longer, it won’t end with a sudden burst of blue skies; and, it won’t lead to types of rebuilding efforts — there are no roofs to be rehinged — that have historically helped the economy bounce back from natural disasters.”
     “The shape of the economy as it absorbs and eventually recovers from the coronavirus epidemic is more likely to be U-shaped than V-shaped — with a prolonged bottom.”
     “Ever since the scope of the coronavirus epidemic in Wuhan started becoming clearer in January, economists have been cutting their growth forecasts,” Mr. Lahart wrote. “Earlier this year, for example, Deutsche Bank forecast that the U.S. gross domestic product would grow at a +1.7 percent annual rate in the first quarter of 2020, and +2.2 percent in the second quarter. Now, economists are looking for GDP growth of +0.6 percent in the first quarter, followed by a -0.6 percent in the second. In the third quarter, they look for growth to resume, but, says Deutsche Bank Global Head of Economic Research, Peter Hooper, “there is no question there will be an overall loss of economic consumption and investment activity that does not come back.”
     “Like most of his peers, Mr. Hooper believes the U.S. will skirt a recession,” Mr. Lahart wrote. “That is by no meams a given. The risk of an economic downturn is very real.”
    And, when the virus does appear to be fading away, doesn’t mean it will be business as usual right away. “Bussineses, people, and authorities aren’t likely to lower their guards right away,” Mr. Lahart wrote. “Rather, they will continue to engage in many of the cautious behaviors that helped arrest the virus’s spread. So, there will be no sudden booking of vacations, and no immediate resumption of major business conventions.”
     “No V in other words,” Mr. Hooper concludes. “The coronavirus epidemic will weaken the U.S. economy, and that weakness will last an uncomfortably long time.”
     Maybe. What Mr. Lahart does not discuss is what the U.S. Federal Reserve, and other central banks around the world are doing in respons to the coronavirus. Granted, the Fed cannot print a vaccine. But, central banks and governments around the world are likely to reduce interest rates and provide substantial fiscal stimulus that will provide a tailwind to economic growth. Cruise lines and airlines, vacation resorts, etc. will offer big discounts and incentives to take a cruise, fly, and travel. I do believe that more infections are coming. But, the U.S. pharmaceutical industry — which has been piloried in the media — may well provide both theraputic help and a vaccine soon. It is likely to be a U-shaped recovery; but, interest rate drops and fiscal stimulus can cure a lot of economic ills; and, perhaps sooner than Mr. Lahart thinks.  RCP, fortunascorner.com

3 comments

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