JPMorgan: Economy will shrink in first quarter due to COVID-19 spike

The U.S. economy is set to shrink in the first quarter of 2021 as a result of the out-of-control spread of COVID-19, which is forcing state and local governments to reimpose restrictions, according to an analysis by JPMorgan.

“This winter will be grim, and we believe the economy will contract again in 1Q, albeit at ‘only’ a 1.0% annualized rate,” the forecast headed by economist Michael Feroli found.

The current stage of the pandemic has seen case counts rise to record levels, averaging over 160,000 a day, well above the earliest peaks in March and April.

While early action from Congress helped prevent an even worse economic meltdown, the recovery has slowed as Congress has failed to pass further relief.

“By a wide margin, the course of the virus has been the most important factor shaping the outlook. But fiscal policy has been firmly in second place,” the report noted.

Expectations that a relief deal worth $1 trillion will be reached in early 2021, alongside renewed hopes that highly effective vaccines will be widely distributed by mid-year, led JPMorgan to forecast an economic resurgence that will see annualized growth in the third quarter hit an annualized 6.5 percent, and full year growth at 3.4 percent.

But the double dip recession means the outlook remains worse than it would have had the virus been kept under control.

“Alas, some lasting damage still seems inevitable,” the analysis said.