Interview with Economics Professor Dr. Alan Gin to get his take on the current state of the macroeconomy.
To better understand the current and expected impact of COVID-19 on the economy, unemployment, and GDP, SEG interviewed expert economist and Associate Professor of Economics at the University of San Diego, Dr. Alan Gin. To read Dr. Gin’s biography, please click here.
Dr. Gin shared his thoughts and guidance on the COVID-19 pandemic and suggests technology companies will likely perform better than others. He also predicts the macroeconomy will slowly rebound in the second half of 2020 as businesses begin to reopen, unemployment drops, and GDP rises.
Current State of the Macroeconomy Interview Highlights:
Q: How have things been changing now that the economy is opening? How do you think the shutdown and the reopening has affected smaller businesses now and in the future?
A: I think we’re going to see businesses gradually reopening, but the recovery is going to take a long time.
In fact, I think a lot of the businesses that closed during this shutdown are not going to reopen. For example, a lot of restaurants are not going to be able to reopen. Restaurants are operating under pretty thin margins already. A lot of them are not going to be able to make it with 25 to 50% occupancy.
As far as the recovery is concerned, people are going to want to go back to work, but there are probably not going to be a lot of jobs out there.
The larger corporations have the financial wherewithal to deal with a situation like this, where some of the smaller businesses were hurt badly by this – even the federal bailout is not enough to help them get through this. I think we’ll see a portion of smaller businesses close as a result of this.
Q: You specifically mentioned the restaurant industry is going to get hit hard or has been hit hard by this. Are there any industries in your mind that will fare this recession better than the others?
A: I think anything related to a technology is going to do fairly well in the sense that they have the resources and their employees are capable of working remotely.
That’s been the key difference as far as the shutdown is concerned. Some people are able to get through it because they were able to work remotely from home. And again, I think a lot of tech companies would fall in that category. The ones that have been hit particularly harder were the people that could not work from home – those are largely areas that provide services: restaurants, barbershops and nail salons, where you have close physical contact.
So again, I think a technology company is going to do relatively well.
Q: We talked a little bit about how the service industries are being hit hard and technology companies are going to weather the storm a little better. Do you see any downstream effects of all of this?
A: Some people might think, “I’m okay because I am able to work from home.” The problem is that this could spread throughout the entire economy. More than 20% of the workforce is out of jobs and they’re not spending money which is going to affect all up and down the supply chain. Eventually, then that could work its way into companies that right now look relatively immune to the economic downturn.
Q: Do you have any advice for businesses that are currently being affected by this or that may be affected by this long-term?
A: That’s a difficult question because this is a situation that we’ve never seen before. The response to this is probably not an economic one.
On the health front, we have to get a vaccine developed. We have to get testing more widespread so people feel comfortable going out and being in businesses that are affected by this.
Though we’re probably going to see a rebound in the third quarter of this year, it will still leave us short of where we started but at least we’ll start seeing a little bit of a comeback. The comeback could take a take a long time to manifest itself but I think eventually the economy will rebound. Unfortunately, a lot of businesses may not have the resources to weather the length of time.
Q: We have three possible scenarios that may happen in the next six to 12 months. The first: there’s a second wave of the virus later this year, which many experts are assuming that’s going to happen around flu season. The second scenario is there’s no second wave. The third scenario is there is a vaccine developed in 4Q2020 or 1Q2021. How do each of those scenarios affect the economy, unemployment, etc.?
A: If we have a second wave, that’s probably the worst possible scenario. Businesses are going to start to break down again. At its worst, GDP is probably going to fall more than 30% in the second quarter and unemployment rate will top 20%. But, without that second wave, we expect the situation to improve. If we have a second wave, it’s going to be trouble because that will probably lead to a second shutdown with devastating impacts.
If there’s no second wave, then the situation will gradually improve by the end of the year. We’ll probably still have a double digit unemployment above 10% at the end of 2020 and will carry into 2021. Some people estimate the public will not return to the level of employment that we had until a number of years in the future, maybe as late as the 2023. Again, the recovery here is not going to be really rapid.
That is, of course, unless you have the third scenario, in which case a vaccine is developed by the end of this year or the beginning of next year. With that, I think what’s going to happen is you’ll see stronger economic growth and a faster recovery when people will feel more comfortable going out. Again, a number of restaurants are going to close, but as people start going out and spending money, more restaurants and stores will pop up to take their place. I think the economic recovery will be much more rapid. Unemployment rate will probably be still relatively high in 2021 but it will probably be below the double digit level.
Q: In your expert opinion, what do you see happening over the next six to 12 months?
A: I think the GDP will fall; we will show a really sharp fall during the second quarter. Estimates are somewhere between 30 and 40%, which would be unprecedented. Given that, I think we’re going to bounce back in the second half. As a result, unemployment will fall and we’ll see strong GDP growth. Unfortunately, that won’t take us back to where we were, but it will somewhat help close the gap.
I think I am in the view that the vaccine will probably not be developed. So, I think the unemployment rate will probably be still around 10% a year from now. Then as far as the labor market is concerned, we’re going to make the slow progress as more and more businesses continue to reopen, and new businesses will start to take the place of those who closed. Given the extent of loss, it is going to take a long time for that to be made up.
If you’d like to discuss how recent events may impact your business, don’t hesitate to reach out.