BofA now expects 2Q GDP to decline 40%, instead of previous -30% projection.

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A three-phase recession will be 'unlike anything we have seen in modern history'
by Myles Udland
May 21, 2020

It’s a long road ahead for the U.S. economy

As of Wednesday, all 50 states had begun to loosen coronavirus-related restrictions in some form or fashion. But the road ahead for the U.S. economy coming out of this pandemic induced recession is a long one.

And according to economists at Bank of America Global Research, things will be even more challenging than initially thought.

“The damage to the economy from this historic shock has been hard to grasp,” the firm wrote in a note to clients published Wednesday. “Indeed, we now believe we have understated the extent of the decline and are revising down the path of GDP.”

The firm now sees the recession playing out in three phases: lockdown, transition, and recovery.
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In the second quarter, BofA now expects GDP to decline at an annualized rate of 40%, up from its prior estimate of a 30% annualized drop in activity. The firm now expects a peak-to-trough GDP drop of 13% — up from its prior forecast for a 10% drop in GDP — which far exceeds the 4% decline seen at the nadir of the financial crisis.

Driving this sharper-than-forecast initial decline is a massive retrenchment in consumer spending and investment, with BofA calling for a 46% annualized drop in consumption and a 35% annualized drop in investment during the second quarter. Of second quarter GDP data, BofA says plainly: “It will be ugly.”

Looking out over the next 18 months, BofA sees a soft labor market, disinflation, and a lack of investment conspiring to keep growth below pre-COVID levels into 2022.

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