Remember when the GDP slowed to a three-year low in 2018’s fourth quarter, and everyone started talking about the possibility of a recession? Get ready for a remix, brought to you by China.
GDP growth in 2020’s first quarter probably will slow to 1.5% from 2.1% in the prior period, according to a forecast from Wells Fargo economists on Wednesday. That would be the weakest pace since 1.1% at the end of 2018. For the rest of 2020, growth probably will average above 2% – unless the Chinese coronavirus that emerged in December takes an unexpected turn, the forecast said.
“The risks just keep on coming,” the report said. “The emergence of a novel coronavirus out of China introduces new uncertainty.”
They’re predicting a slowdown, not a recession, defined as two consecutive quarters of GDP contraction.
It’s not likely to be enough to prompt the Federal Open Market Committee to cut the overnight lending rate that’s used as a benchmark for investors in bonds including mortgage-backed securities. But, you never know with pandemics.
“The virus’ emergence and lengths being taken to curb its spread increase the chance the Fed will need to become more supportive in the coming months,” the forecast said, referring to the partial shutdown of the Chinese economy ordered by authorities trying to contain the spread of the coronavirus. “If the virus is not contained, we would expect the FOMC to cut rates again.”
The death toll from the two-month-old coronavirus that began in the Chinese city of Wuhan has passed 1,000 people, compared with 774 deaths during the two-year outbreak of SARS. The World Health Organization on Tuesday named the new coronavirus Covid-19. The “co” stands for corona, the “vi” designates it’s a virus, the “d” refers to disease, and the “19” designates the year it first appeared, WHO said.
“With the virus occurring around the time of the Chinese Lunar New Year, a time of the year when travel to and from China is elevated and consumer spending is most prevalent, concerns over the impact on the Chinese economy have grown,” the Wells Fargo economists said. “Factory closures have been extended beyond the Lunar New Year holiday, generating disruptions to global supply chains, while travel within and from China has been curtailed.”
When SARS chilled the global economy in 2003, China accounted for about 4% of the world’s GDP. Today, that share has expanded to about 17%.
One consequence of the economic slowdown in China that might help the U.S. economy will be an improvement in U.S. prices for gasoline, the report said. And, when people save at the pump, they tend to put that money toward the consumer spending that accounts for about 70% of U.S. GDP.
“Real consumer spending in the first quarter should get a lift from lower gas prices as China’s weaker growth outlook has sent oil prices to the lowest level in over a year,” the economists said.