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The Global Recession Has Begun, Big Banks Say

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The recession that economists have been forecasting for the U.S. and the world has begun, according to some bank analysts.

“The U.S. recession is here,” reads Thursday morning’s U.S. Economic Viewpoint report from Bank of America.

It’s forecasting a 12% decline in U.S. GDP for the second quarter and a 0.8% decline for the year, fourth quarter over fourth quarter. JPMorgan Chase is forecasting a 14% drop in U.S. second-quarter growth and 1.9% for the year. 

Globally, BofA is forecasting 0.3% growth for the year, with a 1.3% decline in developed markets and 1.4% growth in emerging markets, while JPMorgan sees 0.5% growth for the year with a 0.8% decline in developed markets and 2.5% growth in emerging markets.

“We now expect COVID-19 to cause a global recession in 2020 of similar magnitude to the recessions of 1982 and 2009,” write BofA economists. “Among the big-three economies, the U.S. and the euro area will see negative growth while Chinese growth is expected to come in at a paltry 1.5%.”

JPMorgan economists see a contraction of the U.S. and European economies in the first quarter accelerating in the second. “These outcomes are worse than were recorded during the global financial crisis or the European sovereign crisis,” according to the economists, led by Bruce Kasman.

Both JPMorgan and Bank of America, as well as Wells Fargo, are currently forecasting a rebound in the second half of the year in the U.S. and Europe based on the assumption that the spread of the virus would have peaked in the second quarter, but they admit that the outlook remains very uncertain. 

“Forecast uncertainty is high,” write BofA U.S. economists, led by Michelle Meyer. 

“There is a significant risk that the virus outbreak persists and activity remains restricted for a longer time,” write JPMorgan economists.

Adding to the uncertain trajectory of the virus and efficacy of the medical response are questions about the effectiveness of the massive monetary and fiscal stimulus packages that the U.S. and European central banks and governments are adopting. 

“What we ultimately believe will determine the length and severity of a global recession are the path of the virus and the success of measures taken to ensure rapid containment,” write Darrell Cronk, president of Wells Fargo Investment Institute, and Paul Christopher, head of global market strategy. “It also depends upon whether the recent tightening in financial conditions proves to be an accelerant that magnifies and extends the shock’s impact.”

In the U.S., the Federal Reserve has cut rates 1.5% in the past few weeks, added more overnight liquidity to markets, renewed quantitative easing, initiated backstops for commercial paper and money market funds and extended a currency exchange program with other central banks. President Donald Trump signed emergency legislation for paid sick leave and free coronavirus testing, and lawmakers and the Treasury are negotiating a massive $1 trillion stimulus bill that would include aid for small businesses and the airline industry and checks of $1,000 or more for U.S. households.

The European Central Bank has announced a 750 billion-euro quantitative easing program, the Bank of England has cut interest rates and also initiated QE, and individual countries have announced loan guarantees and grants to support businesses.

The hope is that these measures lessen the impact of growing unemployment and business failures. The latest U.S. weekly jobless claims jumped by 70,000 to hit 281,000. That’s the largest number of claims in 2½ years.

At least today, U.S. and European stock markets seemed pleased with these moves, ticking moderately higher. Global bond markets lost value as yields rose due to deleveraging to meet margin calls and the need to raise cash.

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