U.S. Unemployment Could Reach 15% by June, says Goldman. Markets Turn Red.

Yesterday, global markets rallied as China released a report showing a 50% growth in economic activity in March compared to February.

Indeed, while output is far from the levels it was before the crisis, the data suggests that the economy is slowly improving. Over the past few weeks, the Chinese government has declared victory over the coronavirus and allowed companies to resume operations while keeping a watchful eye over the prevention of an another coronavirus outbreak. It believes that the harsh confinement measures have been successful and that the crisis is now under control.

A recovery?

However, despite this seemingly encouraging news, analysts believe that the Chinese economy will continue under-performing at least until June.

The main issue facing Chinese manufacturing is the brutal contraction in foreign demand. As countries around the world enter lockdown, demand of Chinese exports has decreased to almost zero. Such is China’s reliance on foreign markets that it is essentially producing goods that won’t be sold.

Europe in crisis

While the normalization of the situation in China provides some room for optimism, the European economies are still very far from returning to normal.

Most European countries are in prolonged confinement and the virus is still wreaking havoc. The total body count has surpassed 30,000, with 60% of those deaths coming from Italy and Spain. Hospitals are still flooded with patients and the death toll is expected to continue rising in the coming days. However, authorities remain confident that the confinement measures will soon start to pay off.

From an economic point of view, Europe is at a complete standstill and the European Union is struggling to formulate a coherent economic and fiscal response. It is impossible to predict when – and if – things will return to normal. Even when the virus is contained and businesses do reopen, the trauma caused by the virus means that people may be hesitant to flock to restaurants, bars and other crowded public places as they did before the virus broke out. The economic recovery may be slower than expected.

The saving grace for the European economy is the long tradition of Welfare States subsidizing employers and workers. Germany, the U.K., France…virtually every country is enacting a bailout package of sorts to prevent mass layoffs – Spain is even contemplating forbidding coronavirus layoffs altogether.

America in panic mode

The spread of the virus in the USA is a week or two behind Europe but officials are now realizing the scope of the problem.

Goldman Sachs just downgraded the U.S. economic outlook for April-June due to an estimated 34% contraction in economic activity compared to January-March. This pessimist prediction is based on the fact that cities and states may follow California’s lead and enact strict confinement measures to combat the coronavirus outbreak. Recent developments show that the virus is spreading much faster than originally anticipated.

Consequently, Goldman believes that the economy will collapse at a greater rate than it first thought. Further, they investment bank predicts that the job market will suffer greatly and that the unemployment rate could reach a staggering 15% unemployment by June, a six percentage point increase from their previous prediction of 9%.

Nevertheless, while the short term shock will be hard felt, Goldman expects the virus to be contained within the next couple of months. If this scenario comes to fruition, the economy could begin its recovery between June and September.

How are the markets reacting?

For now, Wall Street is pricing in the pain but the bears will come out in droves if the situation is worse than initially predicted. Even Trump, who was initially confident that the virus would be easily defeated, backpedaled on his recent suggestion that the economy could reopen by Easter.

In sum, it appears that the recent rally was short lived and about to run out of steam. At writing, the S&P 500 is down by almost 3%.

The market has plunged a total of 25% from mid-February levels. and could continue its decline if the bad economic news keeps pouring in.

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