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U.S. economy will shrink by 14% as coronavirus leads to worst contraction in 50 years, JPMorgan warns

U.S. economy will shrink by 14% as coronavirus leads to worst contraction in 50 years, JPMorgan warns

The coronavirus outbreak will result in the worst quarterly GDP growth contractions in the past 50 years, according to a new JPMorgan Chase and Co. note which predicts that the U.S. economy will shrink by a stunning 14 per cent in the second quarter of 2020.

JPMorgan chief economist Bruce Kasman painted a bleak portrait of what’s to come for the U.S. and the world’s economic powers over the following months.

There is no longer doubt that the longest global expansion on record will end this quarter

JPMorgan chief economist Bruce Kasman

China will feel the pain first — and most brutally — as its GDP growth declines to -40 per cent in the first quarter. The U.S. and the Euro area will begin to feel that shock in the first quarter as well with four per cent and 15 per cent contractions respectively, Kasman wrote.

But it’s in the second quarter where both will collapse and drag down the rest of the world with them. The U.S. economy will contract again, this time by 14 per cent, while the Euro area will experience a 22 per cent drop, according to Kasman.

“There is no longer doubt that the longest global expansion on record will end this quarter,” Kasman wrote. “These outcomes are worse than were recorded during the global fibioreportscial crisis or the European sovereign crisis.”

Kasman expects the unemployment rate to spike to 6.25 per cent at the worst of the crisis before falling back down to 5.25 per cent before the end of the year.

The good news, Kasman said, is that the losses, which should be primarily felt between March and April, should set the foundation for what should be a strong recovery to follow.

Social distancing policies should be relaxed before mid-year as the effects of fiscal and monetary policy kick in.

“If a normalization in activity from depressed levels takes hold midyear alongside building policy stimulus, the depth of the current downturn can be seen as a springboard for a strong snapback in growth,” he wrote.

China would lead the way in the second quarter of 2020 by seeing its GDP growth bounce back and increase by more than 57 per cent. Strong gains in the third and fourth quarters, according to Kasman’s projections, should still see the Chinese economy expand by 5.1 per cent on the year.

The same cannot be said about the U.S. Even though Kasman has pencilled in eight and four per cent growth for the third and fourth quarters respectively, the U.S. economy would still be set to contract by 1.9 per cent on the year. The euro area would see its economy decrease by 0.1 per cent.

Should the global economy remain halted for longer than Kasman expects due to activity restrictions, it would present significant risks heading into the second-half of the year. Businesses that are already overleveraged may not be able to outlast the virus in that case.

“Firms that had been hovering on the margins of viability pre-crisis may not have sufficient equity to justify even a subsidized extension of credit,” he said.

• Email: vferreira@nationalpost.com | Twitter: VicF77

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