UBS now sees a deep US recession by July due to the coronavirus pandemic
- UBS now sees a "massive contraction" and deep recession occurring in the US economy caused by the coronavirus pandemic.
- The firm forecasts a 2.1% decline in US GDP in the first quarter of 2020 and an almost 10% contraction in the second quarter of the year.
- Still, UBS thinks the US economy will rebound starting in the third quarter and accelerate as consumer spending and business activity are aided by government stimulus.
- Read more on Business Insider.
Yet another major firm has called for a US recession.UBS sees a "massive contraction" occurring in the US economy in the second quarter of 2020 and a deep recession in the first half of the year due to the coronavirus pandemic.
"Our previous assumptions are invalid and even our downside scenario is becoming too rosy," UBS economist Seth Carpenter wrote in a Thursday note. "For now, we assume that the worst of the virus passes in the US by late April, but restrictions continue until the end of May."The recession call comes amid a growing number of economists forecasting economic distress in the US as consumers are encouraged to practice social distancing, and restaurants, schools, and workplaces have closed to curb the spread of the virus. As the US consumer is the cornerstone of the economy - spending makes up roughly 70% of US gross domestic product - slowing activity is a major concern.
The firm sees three primary components in the US economy that have been hit by the coronavirus pandemic - supply chains have been disrupted, demand has slumped, and oil prices have collapsed. UBS is also forecasting massive job losses, and a spike in the unemployment rate to about 7% from historic lows of 3.5%. Taking all of its quarterly forecasts together, the firm expects a net contraction just below 1% in 2020.Read more: The coronavirus crash has pushed a group of quality companies to the cusp of disaster - and investors must now confront the 3 most dangerous letters in markets "The fact that Chinese production has not returned to pre-corona levels means that US supply chains are disrupted," Carpenter wrote. That means that manufacturing lines will be disrupted with workers displaced, and that inventories of retail goods will be lacking, according to the note.
UBS also sees a few wild cards, including potential bankruptcies in strained sectors and the international trade war. "To say that uncertainty about the forecast is elevated would be an acute understatement," Carpenter said.
Still, while a recession is inevitable and will be painful, the US economy should be able to rebound in the second half of 2020, according to the note. UBS said it thinks the social distancing directive that began in March will likely cease by July, at which point a modest recovery will begin - the firm is forecasting growth over 2%."The income losses and likely bankruptcies of the prior two quarters hold back consumer and business spending," Carpenter said. By the end of the year, growth should bounce back to about 7% as businesses return to stable footing, according to UBS.
Carpenter is also forecasting a solid rebound in consumer spending aided by the "rapid expansion of fiscal stimulus" he expects from the federal government. The White House is working on a potential $1 trillion stimulus package to aid the economy amid the coronavirus pandemic.
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