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Coronavirus Expected to Shrink Economy

Goldman Sachs Group Inc. expects the U.S. economy will shrink an annualized 34% in the second quarter, and unemployment will soar to 15% by midyear, reported Bloomberg (March 31).

However, the economists anticipate a stronger recovery in the third quarter, with gross domestic product expanding 19%. “Our estimates imply that a bit more than half of the near-term output decline is made up by year-end,” they wrote. Although there’s risk of longer-term fallout on income and spending, the aggressive action by the Federal Reserve and the government should help to contain this.

On March 26, the U.S. Department of Labor’s weekly unemployment insurance claims increased the most in history by almost 500%. Over the next few weeks claims could still be in the millions as more people are laid off, claims that were not processed get into the system, and people who were let go but had not filed yet filed, reported Forbes (March 30). The total number of people impacted will still be undercounted as some people won’t qualify, despite losing their jobs.

A survey by The Pew Research Center asked panelists how much of an impact the coronavirus will have on the U.S. economy. It found “nearly half (48%) say it will cause a recession, while another 17% think it will cause a depression. About a third (34%) expect a less severe economic impact and say the coronavirus will result in an economic slowdown, but not a recession or depression.”

The survey also found that, “20% say they, or someone in their household, have been laid off or lost a job because of the coronavirus; 27% say a member of their household has experienced a pay cut or a reduction in work hours. Taken together, 33% say they, or someone in their household, have lost a job or taken a pay cut (or both) because of the coronavirus outbreak.”

Paul Ainsworth, chief U.S. economist, Capital Economics, forecasts, “second-quarter real GDP to fall at a 40% annualized pace (12% quarter-to-quarter), with employment declining by 14 million and the unemployment rate spiking to 12%. The 40% drop is significantly higher than the 10% he previously projected.

Meanwhile, the value of announced mergers in the first quarter is down 33% from a year ago to $572 billion, a seven-year low, reported The Wall Street Journal (March 31). In the U.S., the decline is even more acute at more than 50%.

“Almost every variable is changing, whether it be CEO and board confidence, the availability of plentiful financing, or stock prices,” said Steven Baronoff, Bank of America Corp.’s chairman of global mergers and acquisitions. Aside from those with urgent needs, most companies have put deal making on hold, he said.

Traditional consolidation won’t ramp up until companies are again able to forecast their earnings with any degree of certainty, according to the head of M&A and corporate governance at King & Spalding LLP.