US recession chances now at 80% despite Fed emergency moves: Poll

The coronavirus crisis has almost certainly ended the longest US expansion on record and pushed the economy into the start of a short slump, according to analysts polled by Reuters who gave a median 80 percent chance of recession this year.

The virus and COVID-19, the disease it causes, has spread around the world, crippling global economic activity through lockdowns and business shutdowns. That has triggered financial market panic, ending the longest bull run in stocks in history, including the biggest one-day drop for Wall Street since the 1987 crash.

The Federal Reserve in an emergency move on Sunday slashed interest rates back to near-zero and restarted its asset purchases programme, and since then has added trillions of dollars of liquidity to keep markets functioning.

But that will not be enough to prevent a recession, even though economists for now appear to think the blow will be punishing but temporary, with most expecting at least a modest rebound in the second half of the year.

"We believe that the US economy has fallen into recession, joining the rest of the world, and it is a deep plunge...Although the decline is severe, we believe it will be fairly short-lived," said Michelle Meyer, US economist at BofA Merrill Lynch, who expects gross domestic product to contract by 12 percent in the second quarter after growing only 0.5 percent in the current one.

"We expect the economy to return to growth in Q3. Jobs will be lost, wealth will be destroyed and confidence depressed. The salvation will come if there is a targeted and aggressive policy response to offset the loss of economic activity and ensure a sound financial system."

In the Reuters poll, taken after the Fed's emergency move on Sunday, the probability of a US recession jumped to 80 percent in the next 12 months compared to 30 percent in a survey just two weeks ago, based on responses to a long-running additional question.

That underscores just how quickly the severity of the blow to the economy is becoming apparent.

The latest is the highest since polling began for recession probabilities in January 2008. The previous high was 60 percent in the months running up to the collapse of Lehman Brothers in September that year.

The US economy was expected to grow 0.7 percent in the current quarter, about half the rate predicted in a Reuters poll published one month ago, and well below the last actual reported rate of 2.1 percent for the last three months of 2019.

The economy is then forecast to contract 5.0 percent next quarter, compared to growth of 1.8 percent in the Feb. 20 poll, with forecasts in a wide range, -25.0 percent to +0.6 percent.

Among about 40 economists polled, only 20 respondents forecast a technical recession, defined as two consecutive quarters of contraction, with most saying that would take place in the first half of this year.

In the poll, the majority who gave a prediction for the probability of recession had it above 50 percent, no doubt a reflection of the fact growth rates get revised well after recessions happen.

The median forecast for the worst-case scenario, was an economic contraction in the current quarter of 1.0 percent and then 6.0 percent in Q2.

But the range of point forecasts showed lower lows for this year, with the most pessimistic call of -25 percent in Q2 not seen in Reuters poll records going as far back as 1996.

"The baseline assumption is that the US economy experiences the sharpest quarterly contraction since the global financial crisis in the second quarter, followed by strong sequential growth in the second half of the year," noted Sharmin Mossavar-Rahmani, chief investment officer at Goldman Sachs.

"But the outlook depends on a number of factors including the severity and length of the outbreak, how quickly spending recovers when it abates, and the effectiveness of monetary and fiscal policy in providing support."

For now, the economy is expected to bounce back in the second half of 2020, growing by 1.5 percent in Q3 and 2.5 percent in the final quarter of this year.

The full-year growth outlook for 2020 was slashed to 0.5 percent from 1.8 percent predicted last month and could be -2.0 percent under a worst-case scenario, according to the median forecast.

"For the US and Europe, the COVID-19 shock will likely straddle the first two quarters of the year," noted Bruce Kasman, head of global economic research at JP Morgan.

"The stall in activity in March is likely sufficient to tip both economies into contraction this quarter but the shock's impact is expected to be concentrated next quarter, where both regions are expected to contract at a double-digit annualized pace. These outcomes are worse than were recorded during the global financial crisis or the European sovereign crisis."