Moody’s economist Mark Zandi now thinks the U.S. economy has a 65% chance of entering recession this year due to the coronavirus outbreak and turmoil in the oil industry, a sharp jump from the 50-50 odds he calculated just last week.
If a recession does arrive, it will be particularly hard to combat, says Annie Lowrey of The Atlantic, due to the unusual nature of the downturn.
Here’s Lowrey’s analysis:
- Extreme uncertainty: No one knows how long the outbreak will last, and it may take months for fears to subside and something like normal economic activity to resume.
- Demand and supply shocks at the same time: The outbreak is simultaneously causing serious disruptions in the global supply chain and reducing demand for all kinds of goods, making a recession more difficult to address. “Both supply and demand effects are in play, and both are being amplified by tightening financial conditions,” an S&P Global report said last week.
- Monetary policy near exhaustion: The Federal Reserve has already cut rates to near historic lows, leaving little room to maneuver in the coming months. Lower rates likely have limited effect in the current environment, too, since they can’t help U.S. businesses facing supply chain disruptions in China or public fears of going out to the mall.
- Fiscal policy is contentious: Many economists say it’s time to turn to fiscal policy to boost the economy. Although there are plenty of suggestions from individual experts floating around – see here, here, here and here for examples – Congress and the White House are a long way away from developing a comprehensive plan.
- Political polarization: A divided Congress with high levels distrust between the parties will make it harder to quickly develop and pass stimulus measures, and the fact that it’s an election year adds another layer of difficulty.
- It’s a global problem: Even if policymakers can come up with a solid plan of attack against a complex recession, a global economy means that much depends on what happens in other countries. “COVID-19 came out of nowhere,” says Moody’s Zandi. “It may be what economists call a black swan—a rare and inherently unforeseeable event with severe consequences.”