Family finances: Trouble for the economy until the virus is controlled

Family finances: Trouble for the economy until the virus is controlled

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Mark Zandi says quickly get our groove back.

Mark Zandi, chief economist of Moody’s Analytics, discusses the economic outlook in the wake of COVID-19.

Q: What’s your outlook for the economy? How deep a recession do you see?

A: It’s going to be a struggle between now and this time next year. We are in the teeth of the downturn now. I’m assuming the virus plays out by the third quarter — not gone away, but no longer closing businesses. We’ll get a double-digit pop in GDP as people go back to work.

In the fourth quarter, we’ll get some growth, but the economy will be limping along. For calendar 2020, I expect U.S. GDP to be down almost 6%. Unemployment should peak in the second quarter as high as 15%, but on a monthly basis, we could get to 20%.

Q: What shape will recovery take?

A: We won’t kick into gear until they find a vaccine or a medical treatment that is effective for the virus. Until that happens, I don’t see people traveling, global trade will struggle, and businesses, weighed down by uncertainty, won’t invest or hire aggressively.

Q: Is the $2.2 trillion fiscal stimulus enough?

A: Ultimately, it won’t be enough, but it was a very timely, positive step. It was a valiant effort, and I think it will make a difference. Without it, we’d see a second-quarter decline in GDP of more than 40% — a complete wipeout.

The stimulus is designed to generate a pop in economic growth, but then it goes away. We’ll need more in coming months, possibly including more in unemployment benefits, help for the state and local governments, and more aid to smaller businesses. I suspect there will be a lot of business failures.

Q: Will it take years to recover?

A: No. If we solve the virus, we’ll quickly get our groove back. There will be pent-up demand, and interest rates will be low.

Q: Is the Fed doing enough to keep markets functioning and support the economy?

A: It’s all-in. It has broken the emergency glass. Interest rates are at 0%. They’ve launched infinite quantitative easing to buy every kind of bond they can legally buy, lowered bank reserve requirements and set up all kinds of credit facilities. They’re very committed and very creative. They should succeed in keeping the financial system from cracking up. The risk is that there are fault lines they might not be able to manage quickly enough.

Q: What about the increasing debt load for the federal government and for companies?

A: Government deficits and corporate debt will surge, but this is a problem for another day. Governments need to use all their resources to address the health and economic crisis. If they don’t, we will suffer an economic depression, creating fiscal problems that are much worse. One lesson we can take from this dark time is that in the good times we should work hard to reduce deficits and debt.

(Anne Kates Smith is executive editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com.)

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