The coronavirus pandemic is going to have a lasting negative effect on the U.S. economy. As the article “Economic Effects of Coronavirus Outbreak (COVID-19) on the World Economy” by Nuno Fernandes shows, the economists of leading American banks agree that Q2 2020 will see a sharp contraction in the economy. However, they disagree on its extent: while J.P. Morgan predicts that the economy will shrink by 14%, Goldman Sachs expects a 5% contraction. Although the title of the article draws attention to the alarming comparison with the 7.2% contraction during the worst quarter of the Great Recession, the text is somewhat more optimistic.
The bank economists maintain that they expect the economy to snap back in Q3 and Q4. It would be helped by the expansionary monetary policies adopted by the government, including lowering the interest rate to 0-0.025% and resuming quantitative easing. Nevertheless, as the J.P. Morgan economist points out, there is a risk of the outbreak and the accompanying economic shutdown continuing for longer, which would thwart the hopes for a snapback.
The article mentions issues such as the economic paralysis and closure of businesses in connection to social distancing but does not examine the mechanism behind the recession. It is caused by simultaneous supply and demand shocks that feed into each other. The disruption of international supply chains undermines aggregate supply, while panic and the loss of productivity and incomes from business closures drive down aggregate demand. The combined shock from those unexpected fluctuations makes the recession especially challenging to counteract, as most policy tools deal with either supply or demand. In the absence of clear solutions for either the pandemic or its economic effects, the recession will likely last longer than the bank economists hope. This scenario makes it particularly crucial for the government to support small businesses and the unemployed to preserve the resources necessary for an eventual recovery.