US economy forecast to contract by 1% in 2020: Fitch Solutions

THE US economy is expected to contract by 1 per cent in 2020, said Fitch Solutions in a revised forecast dated Tuesday.

The market insights firm slashed its forecast from a growth of 0.9 per cent for 2020.

Fitch Solutions is also expecting a "negative wealth effect" from the 30 per cent decline in stocks and the major widening of spreads to weigh on private consumption and investment.

This comes as financial conditions continue to deteriorate in the wake of the novel coronavirus' impact in the US - which saw a rapid rise in the number of confirmed cases resulting in lockdowns and rising unemployment.

Private consumption and investment will "contract sharply" as long as these restrictions continue. Currently, private consumption accounts for 70 per cent of the US economy's gross domestic product (GDP), while investment accounts for 18 per cent.

There is also "significant uncertainty" on how long containment efforts will take to bear fruit.

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"Even then, the economy may have to operate well below capacity for several months as various restrictions remain in place as a safeguard against a second wave of outbreaks," the report noted.

Moreover, the positive impact of stimulus measures will be somewhat muted over the short term, Fitch Solutions said.

The recently announced measures will also see the US Federal Reserve's balance sheet swell in coming months, hitting a new post-Global Financial Crisis high.

"While this will help support asset prices slightly and potentially ease financing conditions at the margins, ongoing uncertainty with regard to the success (or lack thereof) of containment measures will ultimately determine market conditions," Fitch Solutions said.

Overall, the US economy is expected to contract in the first and second quarters of 2020, with the bulk of the stress distributed over the second quarter. There is also a risk that contraction in US GDP could potentially extend into the third quarter.

A more meaningful recovery is anticipated in the fourth quarter as stimulus measures start to take hold in the economy, while containment efforts flatten the curve of new Covid-19 cases.

Fitch Solution's forecast is dependent on how fast conditions return to normal, it added.