CBO projects 39.6 percent quarterly GDP drop, $3.7T deficit

The economy will shrink at an annualized rate of 39.6 percent in the second quarter, according to the latest projections from the nonpartisan Congressional Budget Office (CBO), its first to take into account the effects of the coronavirus pandemic.

“The economy will experience a sharp contraction in the second quarter of 2020 stemming from factors related to the pandemic, including the social distancing measures put in place to contain it,” CBO Director Phillip Swagel wrote.

The CBO projects that things will rebound somewhat in the third quarter, with 23.5 percent annualized growth, followed by a projection of 10.5 percent growth in the final quarter of the year.

 

All in all, it predicts the economy will shrink by 5.6 percent for the year, and return to growth of about 2.8 percent in 2021.

But, Swagel added, “challenges in the economy and the labor market are expected to persist for some time.”

Unemployment is expected to reach nearly 14 percent in the second quarter and rise to a peak of 16 percent in the third quarter before dropping again.

 

The projections see unemployment remaining at 10.1 percent through 2021, higher than its peak during the Great Recession.

The government emergency rescue and stimulus efforts will nearly quadruple a deficit that was already expected to top $1 trillion. Now, the CBO projects, the deficit will land at $3.7 trillion, by far the largest in the country’s history.

The borrowing will inflate the country’s debt to 101 percent of gross domestic product, the first time since World War II that the debt held by the public will be larger than the nation’s economic output in a year.

Economists tend to argue in favor of increasing deficit spending to boost the economy in a downturn, but also warn that steps will be needed to bring deficits and debt down when the economy gets back on even footing.