How Much Will US GDP Shrink This Year? Try 5.4%

Gross domestic product (GDP) is on the chopping block, no doubt about it. The chilling forecasts for 2020, particularly the second quarter, are tumbling in. Among the direst is IHS Markit’s, calling for a 5.4% shrinkage of GDP this year.

That would mean a steeper decline than even in the last recession, the worst since the Great Depression: Back then the economy went down a fraction in 2008 because the financial crisis started near year-end, but the worst of it was negative 2.5% in 2009.

In other words, the research group thinks the 2020 economic fall, brought on by the coronavirus, will be twice as awful as the peak of the Great Recession.

And it will only get worse, wrote IHS’s chief economist, Nariman Behravesh, in a research note. “The risks remain overwhelmingly on the downside and further downgrades are almost assured,” he warned.

A plunge of 5.4% would make the US the worst performer among major economies, by the firm’s reckoning. The next worst is a tie between the eurozone and Brazil, both looking at a 4.5% drop.

Well, at minimum, things aren’t as grim as in the early 1930s. In those days, GDP shriveled 8.5% in 1930, 6.4% in 1931, and peaked at 12.9% in 1932.

Lately, across Wall Street, economists are forecasting bad, bad, bad. They just differ by degree. Goldman Sachs believes in a darkness-to-light scenario involving a harrowing first half (with the economy down by 6.1% in the first quarter and a whopping 24% in the second) followed by a rebound in the second half (12% and 10% for its two quarters), for a 2020 overall slide of 3.1%.

According to a note from Jan Hatzius, the firm’s chief economist, their forecast is built on, among other things, a projected “85% decline in sports and entertainment spending, a 75% decline in transportation spending, and a 65% decline in hotel and restaurant spending.”

Meanwhile, Deloitte’s Daniel Bachman sees a 2020 slide of 2.3%. Raymond James’ Scott Brown thinks the second quarter can fall as much as 15%, while Oxford Economics USA’s Gregory Daco is going for 12%.

The Conference Board has three outlooks for the entire year with the nastiest results hinging on how long the virus sticks around: “In the ‘May reboot’ scenario, GDP growth will shrink by 1.6% in 2020 (over 2019). In the ‘summertime V-shape’ and ‘fall recovery’ scenarios, the contraction will be much stronger (5.5% and 6%, respectively). Businesses should prepare for those worst-case scenarios, which have high probability.”

A slow build-back seems to have the most votes among Wall Street economists. As IHS wrote, “It will likely take two to three years for most economies to return to their pre-pandemic levels of output.”