Biggest economic downturn since Great Depression looms: Experts

Some economists fear the nation is heading toward the biggest economic downturn since the Great Depression, even as the Federal Reserve and Congress race to stop the collapse.

The pandemic shutting down businesses and causing massive layoffs will trigger a massive drop in consumer spending, the experts said. It will wreak havoc on the economy for months to come, they predict.

A Goldman Sachs forecast estimates GDP plunging 24% in the second quarter, noted Gary Hufbauer of the Washington, D.C.-based Peterson Institute for International Economics.

“That’s a pretty gloomy outlook,” he said. “It is absolutely stunning. The numbers are plummeting because of the impact of the stay-at-home rules. It has a pretty devastating impact.

“When you see a 20% GDP drop, you cannot escape the ‘depression’ word,” Hufbauer said. “That’d be as big a drop we’ve seen since the Great Depression. If that were to continue for any period of time, that would definitely qualify as a depression.”

The coronavirus crisis is causing major business interruptions as states implement stay-at-home orders and limit gatherings. Many people have lost their jobs in the last week. There’s also panic in the financial markets.

“Nobody is buying anything, and people can’t go out to work,” said Michael Klein, professor of international economic affairs at Tufts University. “With manufacturing, the international supply chains are tremendously disrupted.

“This could become a doom loop,” Klein added, noting the shock to the real economy, which impacts the financial sector, and back-and-forth. “These things can lead to a very, very bad outcome.”

Nobody knows how long coronavirus will be spreading here, he said. A vaccine will not be ready for at least 12 months, scientists predict.

“There’s just a tremendous amount of uncertainty, and it’s going to be a really difficult period,” Klein said. “We haven’t faced a crisis this massive before, and we don’t know how long it will take to bounce back from it.”

Goldman Sachs does predict a rebound in the second half of the year, with 12% GDP growth in the third quarter and 10% growth in the fourth quarter.

“It’s the big question on everyone’s mind, and it depends on whether the lockdowns are relaxed, whether there are more tests, and whether there’s a treatment that brings the mortality rate down closer to the flu,” Hufbauer said.

With lending in Treasury and mortgage markets threatening to shut down, the Fed announced an aggressive set of programs Monday to try to smooth out those markets. It committed to buy as much government-backed debt as it deems necessary. And the Fed said it plans to buy corporate debt, too.

Its intervention is intended to ensure that households, companies, banks and governments can get loans as their own revenue is fast drying up.

Herald wire services were used in this report.

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