Today, SIFMA unveiled the results of its biannual survey of the chief U.S. economists of 26 global and regional financial institutions. With the emergence of the global pandemic COVID-19 in the first quarter of 2020, the economy and capital markets experienced severe economic and capital markets shocks.
These are difficult times for forecasting. However, 77% of economists expect that the long-term potential GDP growth rate is between 1.5% and 2%, with 55% stating this has not changed from pre COVID-19 estimates.
“COVID-19 has had devastating effects on the U.S. and global economies,” said Ellen Zentner, a Managing Director and Chief U.S. Economist for Morgan Stanley, and chair of SIFMA’s Economic Advisory Roundtable. “The Roundtable expects recovery to pre COVID-19 GDP growth levels by the end of 2022 and does not expect the U.S. to enter negative interest rate territory. When gauging risks to the outlook, it is of no surprise that the pandemic and business confidence appeared among the top risks – both to the up and downside.”
The Economy:
Unsurprisingly, both the current and forecasted GDP numbers now show an expectation that 2020 is headed for the deepest recession on record (-5.5% median forecast, 4Q/4Q), increasing to 4.7% (median forecast, 4Q/4Q) for 2021. 59% of respondents considered COVID-19 and trade tensions in their forecasting.
In terms of unemployment, economists expect the already elevated unemployment rate to reach 9.5% in 2020 and 7.2% in 2021. Specifically, employment growth (average monthly change in non-farm payroll employment) is expected to become negative in 2020, -1,106k.
As for the recovery of the economy, 77% expect a swoosh-shaped recovery, followed by 9% for both V-shaped and U-shaped.
Monetary Policy:
When asked whether the U.S. will follow others into negative rate territory, 100% of respondents said no. However, 86% of economists think rates will not begin to normalize until after 2021, with the top factors to the Fed’s decision making labor being the labor impact of Covid-19, large scale return to work, and if there is a second wave of Covid-19.
With yield curve caps or control (YCC) as one monetary tool the Fed could use to boost the economy when short-term interest rates hit zero, 78% expect the Fed to embark on some form of YCC. 53% expect the Fed to begin YCC by mid-2020, with 47% forecasting the end of 2020.
In terms of inflation, economists expect it to decrease to 0.3% for the PCE deflator and 0.9% for the core PCE deflator in 2020, in comparison to 1.4% and 1.6% in 2019, respectively. COVID-19 recovery time and economic slack/unemployment were the top factors in this consideration.
As for interest rates and credit markets, economists identified risk aversion/flight to quality and U.S. economic conditions as the factors that have the greatest impact on expectations for long-term Treasury yields in 2020. For key rates movements, 63% expected the yield curve to steepen, and 59% expected the TED to remain the same.
Macro Policy:
When considering legislation, 67% expect no major, non COVID-19 related legislation during the upcoming election cycle. When asked to describe the election outcome assumed when making these estimates, 82% responded with a divided government with Republicans leading Senate, followed by 18% expecting a Democratic sweep.
Focusing on the U.S.-China relationship, 50% expect the U.S. and China to eventually agree on no trade deal, followed by 45% expecting a light deal. When asked if the current negative sentiments around China’s handling of COVID-19 will impact future trade negotiations, 55% responded significantly, followed by 40% somewhat. None expect it will end all chances of negotiation.
Note: This survey was put into the field and populated between April 30 and May 28, prior to China’s passing of the Hong Kong security law and the certification to Congress by Secretary of State Mike Pompeo that Hong Kong no longer enjoys a high degree of autonomy from China.
