Business: U.S. economy to dodge coronavirus blow, but risks to downside

  • Economy

The impact of the coronavirus outbreak in China on U.S. economic growth will be negligible and short-lived, according to economists in a Reuters poll who nonetheless now say risks to their forecasts are skewed more to the downside.

The outbreak has also significantly increased the chance Beijing doesn’t comply with all of the terms of a Jan. 15 initial trade agreement signed with Washington, potentially reigniting a damaging trade war between the world’s two largest economies.

Still, medians from the Feb. 10-19 Reuters poll of over 100 economic forecasters found the overall U.S. economic growth outlook for this year unchanged compared with last month.

The forecast for growth in the current quarter was reduced just 0.1 percentage point to a seasonally adjusted annualized rate of 1.5% – already slow, even by recent standards. The economy was then expected to grow 1.8-2.0% each quarter until end-2021.

“At this point, we are assuming the coronavirus impact will be relatively small, and more importantly, temporary. So whatever drag there is in the first quarter will largely be reversed in the second,” said Jim O’Sullivan, chief U.S. macro strategist at TD Securities.

“It will not have a significant impact on the U.S. economy. But that is certainly a risk for sure. I mean, that is the source to downside risk if it keeps escalating.”

Growth is expected to pick up to 1.8% in the second quarter of this year, only slightly slower than the 1.9% forecast in the January poll.

In that survey, which was conducted before the World Health Organization declared the coronavirus a global public health emergency, 56% of economists said the risks to their U.S. growth views were more to the upside.

However, as the outbreak spread, that has switched around to nearly 70%, or 33 of 48 respondents now saying the opposite. Around 75,000 people have been reported as carriers of the virus globally, with over 2,000 confirmed dead.

Despite these risks, the likelihood of a U.S. recession in the coming year only edged up to a median 23% from 20% in January.

“The threat the coronavirus outbreak poses in an environment of already subdued global growth underlines the potential for medium-term U.S. economic weakness,” said James Knightley, chief international economist at ING.

“It is impossible to forecast the path of the virus, but it increases the chances the Federal Reserve will cut rates at least once more to provide some support to the economy.”

While the consensus showed the Fed would keep rates unchanged at 1.50%-1.75% at least until the end of next year, Reuters analysis showed nearly 40% of economists polled now expect at least one rate cut at some point this year.

“We think the Fed will keep rates on hold, but we agree with the market that there are asymmetric risks to policy where easing is more likely than tightening,” said Michelle Meyer, U.S. economist at BofA Global Research.

“With underlying economic data remaining robust, core inflation trending higher and policy already accommodative, there is a higher hurdle to cut this year than last.”

The poll found that inflation as measured by the core PCE price index, the Fed’s preferred gauge, would range between 1.8% and 1.9% until the second quarter of next year and touch the central bank’s 2% target in the second half of 2021.

When asked if the chance of non-compliance by Beijing with the terms of the initial trade agreement had increased significantly since the coronavirus outbreak, nearly two-thirds of economists, 30 of 48, said yes.

That stands in contrast to results from a separate poll last week on the hit to China’s economy, in which about 56% of economists said the chance of non-compliance had not increased.

“If domestic activity in China remains severely negatively affected by the outbreak of the virus, in our eyes, it’s highly likely the Chinese would try to reduce the purchases of U.S. goods they have promised,” said Bernd Weidensteiner at Commerzbank.

“There is actually a paragraph in the Phase 1 agreement that in case of natural disasters…there is a way to purchase less than the promised amount, and they have a reason now that they cannot fully live up to their commitments, which are relatively generous,” he added.