The US economy will shrink in the 1st quarter of 2021 as winter weather spurs virus resurgence, JPMorgan says

unemployment insurance poverty job loss economic recession america coronavirus pandemic New Yorkers in need wait in a long line to receive free produce, dry goods, and meat at Lincoln Center on July 29, 2020.

  • JPMorgan expects the US economy to contract in the first quarter of 2021, telling clients that rising COVID-19 case counts will make for a “grim” winter.
  • The team led by Michael Feroli lowered its first-quarter growth forecast to -1% in a Friday note.
  • Distribution of a coronavirus vaccine in early 2021 will fuel a quick bounce-back, the team added.
  • JPMorgan expects second- and third-quarter growth to reach 4.5% and 6.5%. The estimates also hinge on Congress passing a $1 trillion stimulus bill early next year.
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JPMorgan expects the US economy to shrink in the first quarter of 2021 as new lockdown measures cut into economic activity.

Economists led by Michael Feroli lowered their first-quarter gross domestic product forecast to -1% on Friday, making JPMorgan the first major bank to call for a contraction at the start of 2021.

Soaring COVID-19 cases and new restrictions on businesses are freezing activity as the recovery was already showing signs of slowing. While initial summer reopenings provided a key boost, “the economy no longer has that tailwind,” JPMorgan said. The current leap in cases will make for a “grim” winter, the bank added.

JPMorgan is the first major bank to call for a first-quarter contraction. Goldman Sachs similarly lowered its first-quarter forecast on Saturday but still expects 1% growth through the period.

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The country’s  battle against COVID-19 is going poorly. The US reported 150,098 cases on Sunday, according to The COVID Tracking Project. The figure brings the 7-day average for new cases to 167,568. Total deaths neared 250,000 and hospitalizations reached 83,782.

Public health experts have warned that holiday traveling and colder weather can exacerbate the spread of the coronavirus in the coming months. States and cities have implemented new restrictions to counteract the new wave, but the lockdowns risk weakening an already slowing recovery.

The forecasted first-quarter slump should be offset by strong growth in the following six months, the economists said. Hopes for vaccine distribution in early 2021 are growing more plausible as pharmaceutical companies reveal encouraging trial data and apply for emergency-use authorization.

A shot will be available for health care providers, essential workers, and vulnerable populations by the second quarter, JPMorgan said. Broader distribution will come soon after and further lift the economy, the economists added.

The team expects second-quarter growth to reach 2.5% while third-quarter GDP will grow 6.5%. The pace of recovery will cool in the fourth quarter to 3.8% growth.

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“Uncertainties abound, but if this timeline is broadly correct, a normalization of activity should give meaningful support to growth in mid-2021,” the economists wrote.

Risks throughout next year skew to the upside and downside. Better-than-expected trials could see a vaccine distributed ahead of schedule and drive stronger second-quarter growth, according to the bank. On the other hand, approval processes could take longer than expected and delay a rollout. 

Fiscal policy will also play a critical role in nursing the economy back to pre-pandemic health. JPMorgan expects Congress to pass another $1 trillion stimulus package near the end of the first quarter. The bank’s mid-year forecasts hinge on such fiscal support. Democratic wins in both of Georgia’s upcoming Senate run-off elections would open the door to a much larger package, but continued gridlock between parties jeopardizes the chances of any bill reaching the president.

President-elect Joe Biden is already working to break through the legislative stalemate. The New York Times reported on Sunday that Biden’s economic advisors are pressuring Democrats to reach a deal with Republicans, even though such a compromise would fall below the $2.2 trillion measure passed by Democrats in October. The threat of a so-called double-dip recession heightened the team’s urgency to pass additional fiscal relief, the Times reported.

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