The longest economic expansion in history has been brought to a thundering halt this week as the United States economy shrank by 4.8 per cent in the first quarter of 2020.
Starting in June 2009, as Americans were dusting themselves down following the blowout of the 2008 financial crisis, the 129-month expansion was the largest period of unbroken economic growth on record.
It has been brought to an end by a recession that could well break many records of its own in the weeks and months ahead.
Yesterday’s (April 29) announcement was considerably worse than economic forecasts. The expectation was that US GDP would contract by 3.8 per cent in Q1 2020, but the true figure as we now know is 4.8 per cent.
It’s the most significant warning sign to date for what might come to pass here in the UK, where the Office for National Statistics (ONS) is preparing to release its Q1 2020 growth figures next month.
At 4.8 per cent, the US economy is now officially contracting at its fastest rate since the Great Recession of 2008, when it fell by 8.4 per cent in Q4.
Figures released yesterday will almost certainly be dwarfed by the contraction predicted in the second quarter of this year.
John Dance, founder of Newcastle-based independent stockbroker, Vertem Asset Management, says: “Despite the big Q1 decline of 4.8 per cent, the lockdown in the US only really started in mid-March, which equates to roughly one sixth of the measured period. The Q1 contraction is therefore likely to pail in insignificance versus Q2 2020.”
Indeed, the two major American investment banks, Goldman Sachs Group and JP Morgan Chase & Co, say their expectation is for US GDP to shrink by 34 and 40 per cent respectively in the period April to June.
These apocalyptic estimates would appear to be borne out by the latest US unemployment figures, which show that an unprecedented 26 million people filed for joblessness benefits in the last month.
Goldman Sachs expects US unemployment to surge to 15 per cent as early as the middle of this year. The figure quoted by JP Morgan is even higher at 20 per cent.
That forecast would mean one in five American workers are out of work by the summer, making this the fastest deterioration in US labour market history.
As recently as February, levels of unemployment in the world’s largest economy were the lowest on record, with just 3.5 per cent without work.
Here in the UK, we have seen the same kind of record-breaking labour market triumphs.
Thankfully, the British Government has brought in various job retention and income protection schemes, but that hasn’t been able to prevent 1.4 million people having to apply for universal credit in the past six weeks.
Moreover, there is concern that we could see a similar acceleration to US unemployment trends when Government schemes to protect jobs come to an end.
What happens in America is important for the UK for a number of reasons. First of all, the US is the world’s largest economy and the global centre of finance, which means that when it rains stateside, it pours just about everywhere else.
Second is the fact that the US is by far the largest consumer of the world’s goods and services, representing 26 per cent of the entire global consumer market as of 2017.
A 4.8 per cent Q1 2020 contraction in the Land of Opportunity, therefore, has enormous implications for global demand.
The ONS is set to release UK GDP figures for Q1 2020 on May 12. Predictions made back in March by KPMG forecast a first-quarter contraction of between 1.2 and 1.6 per cent.
This would indicate that the UK has fared better than our Atlantic neighbours between January and March but I would be surprised if that was true. The UK should brace itself for a similar hit in Q1 2020 to that recorded in the US and released yesterday.
Curiously, the financial markets closed in the positive yesterday, despite the sharpest decline in US GDP for more than a decade.
John explains: “Equity and risk markets were relatively buoyant at the time of the announcement, presumably on the expectation that the Federal Reserve and other central banks will continue with unprecedented levels of support to the world’s financial and economic systems.”
As we bid farewell to the longest economic expansion in history, I can’t help but wonder if we’re saying hello to the biggest recession.