Think tank PIIE forecasts US growth to contract 8% this year

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The U.S. output is expected to shrink by 8.0 percent in 2020 amid mounting economic fallout from COVID-19, and unemployment rate will probably peak around 20 percent in the early summer, according to Peterson Institute for International Economics (PIIE)'s semiannual Global Economics Prospects outlook released Friday.

"I'm forecasting that economic activity will be 20 percent below normal in April and May," Karen Dynan, a nonresident senior fellow at PIIE and economics professor at Harvard University, said at a press call on the economic outlook.

Those numbers would mean a 50-percent drop at an annual rate in the second quarter, said Dynan, who formerly served as chief economist at the U.S. Treasury Department.

The economist predicts that the U.S. unemployment rate will probably peak around 20 percent or "maybe even higher" in the early summer, the highest level since the Great Depression.

When asked about the persistence of job loss, Dynan said unemployment rate will come down "pretty quickly" in the third and fourth quarters, and certainly fall into the single digits by the beginning of next year.

"But even by the end of the next year, I think we're still going to be looking at something like a 6 percent unemployment rate," she said.

Adam Posen, president of the PIIE, told reporters that he thinks the amount of "labor scarring" is likely to be very low, noting that 2.2-trillion-dollar rescue package, among other things, would help support constrained businesses and individuals.

Dynan also noted that the United States has taken aggressive monetary and fiscal policy steps to cushion the blow of the pandemic, adding that she expects more fiscal actions to support the economy in the near future.

"We know we're going to need more money for states and localities, more money for small businesses, more money for the unemployed," she said.

Dynan said the most likely scenario would be a check-mark shaped cycle, which means a sharp downturn followed by a relatively slow recovery.

The newly released semiannual economic forecast also showed that global output is on track to shrink by 3.4 percent in 2020 due to the mounting impact of the COVID-19 pandemic.

"The shutdowns that are critical for containing the virus are causing a deep global recession," Dynan said.

Olivier Blanchard, PIIE senior fellow and former chief economist at the International Monetary Fund, said during a webinar Friday that this is a completely different crisis from an economic viewpoint, with a brutal and binding decline in potential output rather than the usual softening of demand.

Blanchard argued that fiscal policy in this context must have three goals -- infection fighting, disaster relief, and aggregate demand management.

On debt sustainability, he said interest rates are likely to remain very low in advanced economies, so that higher levels of debt should be sustainable, but for middle- and low-income economies, debt standstills and debt restructurings are likely to be needed on a large scale.

Dynan said almost all major economies are going to see contraction this year, while noting that China is going to see a moderate growth of 1.5 percent, "partly because they're ahead of other countries in terms of the virus, but it's also just because their normal growth rate is so high." 

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