Longterm impact of coronavirus on the economy

James McCann, Senior global economist at Aberdeen Standard Investments, joins Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Dan Roberts to discuss how the markets are being impacted by coronavirus.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to welcome James McCann now. He is Senior Global economist at Aberdeen Standard. James, thanks for being with us. Just a few moments ago St. Louis Fed President James Bullard said on a teleconference with reporters that the data we're going to see, the economic data we will see in the second quarter, will be the worst in this country's history. We've got jobless claims coming out tomorrow. We are expecting an awful number there. What are your expectations?

JAMES MCCANN: Yeah, absolutely. I'd agree with those comments. I think we're going to see a really shocking swathe of economic data. Millions of people losing their jobs in an incredibly short space of time, a contraction that could look around 40% to 50% of GDP over Q2.

As you purposefully shot large portions of your economy down, I think this is really unprecedented in terms of the depth of the drop in activity, but also the speed. Back in February activity was looking like it was actually improving in underlying terms, and now we're already finding ourselves in what's going to be a deep recession. I guess the question is, how long does that prove?

BRIAN SOZZI: Yeah, good point with the deep recession. That seems to be the theme that we're hearing from a lot of sources-- as it shows. Do you think the US economy will come back in that V shape recovery? I think the theme in the market is now starting to change, that things won't come back until early 2021.

JAMES MCCANN: Exactly. I mean, we're all thinking about letters here, and I think that V has generally shifted in terms of the consensus to more of a U, and I think the expectation is that that downturn will prove first of all, deeper, but also more lasting. But I guess the key question is, can the economy snap back?

We're really turning off the economy, and when you try and turn it back on, so if we're able to start to lift some of these restrictions on economic activity, will it come back, or will the underlying damage of that drop in activity, the rise in unemployment, the increase in business distress, will that start to generate its own self reinforcing mechanisms, which means actually our ability to snap back in either late 2020, early 2021, is just not there.

DAN ROBERTS: James, Dan Roberts here. I'm glad you mentioned the ability to snap back and how long this will last, because I'd ask you whether you think that companies are indicating right now that they realize how long the fallout from this will last. Because you still hear, not only the administration, but I think some CEOs, really focusing on optimism, which I understand, but thinking about things in terms of weeks, not months.

And yet what you hear from the experts is that even if and when we get sort of the all clear and the US economy reopens and stores reopen and bars and restaurants reopen, obviously this is going to have an impact on company's earnings for months beyond that point. And so I'm curious how optimistic we can really be. I mean, clearly even if it's in spring or summer that things can reopen, this is probably going to have an impact on say, the holiday shopping season, which is so important.

JAMES MCCANN: I mean, that's right. And we're all trying to be epidemiologists here, which I think is very few people's skill set. But it's really difficult trying to understand what the medical science is telling us, how the infection rate will evolve as the weather improves, for instance. Is it possible for people who've had the virus to re-contract the virus in the future? Is it the case-- it's an interesting piece from the University of Oxford overnight that actually infection rates might have been much, much higher, which would suggest we're getting closer to this herd immunity.

So I think the challenging thing is that it's really unclear about how the path of the virus will unfold. And that means for businesses, they just have to put everything on hold. They might not know if it's going to be a one month or a six month or a 12 month hiatus. But it means from their investment, from their activity, they just need really to shut up shop.

And I think that's what we're seeing in terms of the short term data from layoffs. I expect all types of investment pretty much to really, really go on lockdown. And really I think those businesses probably have to start preparing, at least in part, for the worst, and maybe hope that some of this activity comes back a little sooner than they're factoring in.

ALEXIS CHRISTOFOROUS: You know James, going back to those Bullard comments this morning, I just want to read a few of those off for you and get your response. So the St. Louis Fed President, James Bullard, saying that we could see what he calls a boom by autumn. He says he's offering some sort of a timeline. I mean, this is all a guesstimate at best.

But he says by July there could be what he's calling a transition period as some businesses come back online. By October, he says some projects could resume that were delayed in the spring, and then a lot of that pent up demand could lead to a fourth quarter boom that could last into 2021. And he actually likened it to a car on the highway that comes upon a construction zone. Right, we've all been there. You sort of slow down, you take a look at what happened, even though there is nothing inherently wrong with the engine. What do you make of that analogy, and also of his timeline?

JAMES MCCANN: Look, I think it's a nice analogy, and a nice way of thinking about it. I think it's absolutely true that should some of these restrictions start to be removed, and there is going to be some pent up demand there, I guess the key question is does this change from a period in which people are just having to slow down, to take a look, to try and understand the safety around those roadworks, those traffic stops, or do you actually get a full on traffic jam at that point? Does it mean that cars come to an absolute standstill, and you're stuck there, instead of for a few months, you're stuck there for a number of quarters.

And I think that's the important question. I think most people in markets are still expecting that, as I mentioned earlier, that extended U shape. Maybe I think the autumn might be a little ambitious at the moment, but still they're expecting that profile where things are able to come back.

But I guess the thing that makes me more nervous is how much damage do you do during that slowdown? Is it the case that businesses struggle to continue? Is it the case that they're in a financial position to hire when you come back? And I think that's really what the Fed is doing from a policy perspective, what Congress agreed to-- sorry, at least the senate agreed to last night. They're trying to work out bridge mechanisms to get you to that period, to prevent that slowdown from becoming an absolute stall in economic activity.

ALEXIS CHRISTOFOROUS: All right, James McCann, senior global economist at Aberdeen Standard. Thanks for being with us, and stay safe.

JAMES MCCANN: Thank you, you too.