US Economy Shrinks 3.5 Percent In Covid-hit Year

Stuck in the grip of a viral pandemic, the US economy grew at a 4 percent annual rate in the final three months of 2020 and shrank last year by the largest amount in 74 years.

For 2020 as a whole, a year when the coronavirus inflicted the worst economic freeze since the end of World War II, the economy contracted 3.5 percent and clouded the outlook for the coming year. The economic damage followed the eruption of the pandemic 10 months ago and the deep recession it triggered, with tens of millions of Americans left jobless.

Thursday's report from the Commerce Department estimated that the nation's gross domestic product slowed sharply in the October-December quarter from a record 33.4 percent surge in the July-September quarter. That gain had followed a record-shattering annual plunge of 33.4 percent in the April-June quarter, when the economy sank into a freefall.

The pandemic's blow to the economy early last spring ended the longest U.S. economic expansion on record – early 11 years. The damage from the virus caused GDP to contract at a 5 percent annual rate in last year's January-March quarter. Since then, thousands of businesses have closed, nearly 10 million people remain out of work and more than 400,000 Americans have died from the virus.

The estimated drop in GDP for 2020 was the first such decline since a 2.5 percent fall in 2009, during the recession that followed the 2008 financial crisis. That was the deepest annual setback since the economy shrank 11.6 percent in 1946, when the economy was demobilising after World War II.

The most catastrophic annual contraction in records dating to 1930 was a 12.9 percent fall in 1932 during the Great Depression.

The government's report on Thursday was its first of three estimates of growth last quarter; the figure will be revised twice in the coming weeks.

The outlook for the 2021 economy remains hazy. Economists warn that a sustained recovery won't likely take hold until vaccines are distributed and administered nationwide and government-enacted rescue aid spreads through the economy, a process likely to take months.

On Wednesday, the Federal Reserve took note of the economic threats. It kept its benchmark interest rate at a record low near zero and stressed that it would keep pursuing its low-rate policies until a recovery is well underway.

The Fed acknowledged that the economy has faltered in recent months, with hiring weakening especially in industries affected by the raging pandemic, notably restaurants, bars, hotels and others involved in face-to-face public contact.

Hiring in the US has slowed for six straight months, and employers shed jobs in December for the first time since April. The job market has sputtered as the pandemic and colder weather have discouraged Americans from travelling, shopping, dining out or visiting entertainment venues. Retail sales have declined for three straight months.

Last month, the government enacted a US$900 billion rescue aid package, and President Joe Biden is pushing for lawmakers to follow up by approving his US$1.9 trillion plan for further economic help. Biden’s proposal has met resistance, though, from many Republicans who contend that the cost is too high and some of its benefits misplaced.

Many economists warn that without further support, the economy risks succumbing to another recession. They note that much of the aid for individuals from the US$900 billion package is set to expire in mid-March.

“The economy is still struggling,” said Mark Zandi, chief economist at Moody’s Analytics. “How strong the economy is later this year will depend on how the virus evolves and the effectiveness of the vaccines and mitigation efforts.”

Zandi predicted that the economy will expand at a 4.4 percent annual rate in the current quarter and achieve annual growth rates later this year above 5 percent. But he cautioned that his forecast is based on the enactment of further federal economic relief, and he expects Biden initially to win congressional approval for only about half his US$1.9 trillion proposal.

About 5 million jobs, Zandi estimates, will never return, forcing the unemployed in such industries as restaurants and bars to find work in other sectors.

“We have lost so many low-paying service jobs at restaurants, hotels and in transportation,” said Sung Won Sohn, an economics and business professor at Loyola Marymount University in Los Angeles. (AP)