Economics Weekly: A Recession Now Looks Inevitable

Friday, March 13, 2020

The energy price war that erupted over the last week comes as a further major knock to the U.S. economy, which is already struggling from the unfolding impact from the coronavirus—a recession now looks inevitable. The main question now regards the depth and duration of the downturn.

Heading into this crisis the economy had been recovering from what had effectively been the third mini-slowdown since the current economic expansion began back in June 2009 (chart 1)—one that had been brought on by the trade war and slower global growth. The current virus and oil price shocks will now halt this recovery in its tracks. Yet, how long the downturn lasts is unknown at this point and will clearly depend on both the spread of the virus and the response from three players: governments, financial markets, and the Russians and Saudis. First, national governments need to commit more funds to help curtail the outbreak of the virus, quell the panic of the populace, and support those who have been adversely impacted. Something along a similar scale to what the U.K. parliament unveiled this week should be a good template to work from. Second, the more financial market participants continue to run for cover, the greater the potential is of this becoming an even more serious systemic banking crisis—which for the moment it is not. And third, the Russians' and the Saudis' aggressive decision to undertake a price war is now amplifying the existing downtrend in energy prices and its impact on the economy.

Given this week's dramatic collapse in global financial markets and energy prices, in this Economics Weekly we look back at the 2015-2016 energy-related mini-recession and make some comparisons with what we see happening today and evaluate how it helps to contrast with the severity of today's episode.

For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.

Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.

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