How the economy goes the balance of 2020 will be determined by a few “wild cards” – not the least controlling the coronavirus outbreak that has impacted consumer behavior and altered government policy.
So says the “JLL Note: 2Q 2020 Economic Outlook” with analysis from JLL chief economist Ryan Severino.
Some key takeaways from the most recent quarterly JLL report:
- The pandemic has radically altered the trajectory of an economy that was already starting to lose steam.
- The country is facing the worst recession in roughly 75 years.
- Commercial real estate faces challenges even in an upside scenario.
When COVID-19 hit and spread at an alarming rate, governments quickly started shutting down businesses to slow the spread and consumers began opting out of purchasing many goods and services due to health concerns.
Combined, the impact was sudden and widespread and economic activity came to an abrupt halt, said the JLL report.
Widespread lockdowns and marked changes in consumer behavior emerged in mid-March, causing Gross Domestic Product to decline in the first quarter at an annualized rate of 5.0 percent – a rate not seen since the fourth quarter of 2008 during the depths of the financial crisis.
“Government policy pivoted sharply to help support the economy,” said Severino, who heads JLL’s economics team. “The Fed cut interest rates to effectively zero for the first time since the Great Recession and began purchasing assets again” … including exchange-traded funds (ETFs), corporate bonds and municipal bonds “to stabilize fearful markets, keep the financial system operating relatively smoothly and prevent a health-oriented crisis from morphing into a financial crisis.”
On the fiscal policy side, the federal government approved spending in excess of $3 trillion to provide support for the health system, households, businesses, and state and municipal governments.
“The pandemic is causing the downturn – the economy and the pandemic are not independent of each other,” Severino said. “Until the pandemic at least comes under some semblance of control the economy will struggle amidst business closures, restrained consumer spending, job losses, and income declines.”
The economy tanked at such lightning speed that in early June the National Bureau of Economic Research (NBER declared the economy entered a recession – the fastest declaration by the group since it began formal announcements in 1979.
There were other “worst ever” metrics: Real GDP declined by 32.9 percent on an annualized basis, the worst quarterly drop on record since 1947. Peak to trough, real GDP contracted by 10.6 percent, the worst performance since the demobilization effort at the end of World War II.
Just like that, five years of growth vaporized in merely two quarters.
Signs of life came in May and June when the labor market bounced back with job gains, retail spending rebounded and unemployment claims gradually slowed.
But by mid-June the callow recovery was dealt another blow as COVID-19 case numbers surged just as several states rushed to reopen.
Re-openings were recalibrated and consumers once again avoided patronizing businesses out of fear. Job gains slowed dramatically last month and unemployment claims and permanent job losses stopped falling.
As Congress works on a second stimulus package to replace the one that expired at the end of July, the economy will almost certainly grow during the third quarter of 2020 as re-openings pick up, predicts Severino.
JLL projects real GDP growth in the range of 3 percent to 22 percent on an annualized basis across three broad scenarios in the third quarter. But that growth will largely be dependent on controlling future coronavirus cases.
“While the pandemic will not subside fully until we have achieved herd immunity (likely via a vaccine), keeping the outbreak in check would produce benefits for the economy,” said the JLL report. “The more under control the outbreak, the safer consumers will feel and the more likely they will be to reengage the economy, producing economic growth, job growth, etc.’’
JLL’s base case scenario projects continued growth in the fourth quarter, but rests on relatively benign (though non-optimistic) assumptions about the pandemic and government policy.
“Irrespective of scenario, we expect tough sledding ahead for the economy … as job gains continue to slow, business failures persist, and wage growth and spending remain challenged,” Severino said.
Most property types and markets will face noteworthy declines in asking rents and increases in vacancy rates based on the JLL analysis.
“The most prominent upside risk, an accelerated timeline for a vaccine development, does not come with a high probability, but would present the strongest case for the economy outperforming our base scenario,” said Severino. “Downsides risks abound at every turn.”
The most dreaded one: a persistently worsening number of COVID cases, which like déjà vu – will require re-shuttering state economies and businesses.