CBO: A lost decade looms for the American economy

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The CBO warns in a new analysis that the pandemic will reduce cumulative economic production by $ 7.9 trillion over the next 10 years, or 3% of GDP over the decade, compared to its January projections. Without taking inflation into account, the damage amounts to $ 15.7 trillion, or 5.3% of GDP.

The CBO said the revisions reflect expectations of reduced consumer spending caused by company closings and social distancing. In addition, the recent drop in energy prices is expected to “seriously” reduce investment in this sector, the CBO warned.

The recent legislation, which includes over $ 2 trillion in stimuli, will only partially mitigate the economic fallout caused by the pandemic, the CBO said.

The big warning: The CBO has warned that there is an unusually high level of uncertainty around its predictions because the course of the pandemic is unknown and it is unclear how the economy will respond.

The respected number of government crunchers’ report further challenges hopes for a rapid economic recovery from the pandemic, which had been a common talking point in the early days of the crisis.

More than GDP: If recent history is a guide, the recovery of the job market and families may take even longer.

The global financial crisis of 2008 took a bite out of GDP much smaller than what experts expect to see following the pandemic. But 10 years after the start of the Great Recession, labor force participation rates for older workers have remained depressed in the United States and household wealth has started to recover.

Neil Shearing, chief economist of the group at Capital Economics, said that most major economies are in a similar position – at least in the medium term – despite the recent recovery of high frequency data such as road traffic and electricity consumption .

“While the collapse in output caused by the virus appears to have bottomed out, the recovery is likely to be slow and uneven. Most economies are still likely to be below their pre-virus GDP pathways by end of our central forecasting horizon in 2022, “he wrote in a research note Monday.

The cut cited three big reasons why a high frequency data recovery doesn’t tell the whole story.

Reason 1: The recovery follows an extreme economic peak. “The fact that the business is recovering must be seen in this context of the huge loss of production incurred during the blocs. Production in most major economies is still taking place between 15% and 25% of pre -virus, “he said.

Reason 2: High frequency data doesn’t tell us much about what’s going on with demand, one of the biggest factors in any rebound. “The fact that multiple trips are underway is encouraging, but the extent to which this will result in a recovery in consumer spending is unclear,” he said.

Reason 3: Governments and central banks have yet to figure out how to move from crisis mode to recovery and reopen their economies so as not to do more harm.

“Policy must go from fighting the crisis to supporting recovery,” said Shearing. “Making this transition won’t be easy. One of the biggest short-term risks is that governments are moving too quickly to embrace a new round of austerity.”

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