Based on recent political developments, we are reducing our fourth-quarter growth forecast for gross domestic product to 2.25% and our first quarter 2021 forecast to 2.1% because of a likely lack of fiscal aid that will affect the economy and a growing uncertainty around the U.S. election.
The withdrawal of the administration from further talks on fiscal aid is the primary reason for our reduction.
Accordingly, we have adjusted our full-year growth estimate for 2020 to a contraction of 3.6% followed by a 3.8% rate of growth in 2021.
Following the upcoming election, should there be a unified government under Democratic auspices, we will look to revise our forecast higher on the prospect of fresh fiscal aid, stimulus and a likely infrastructure project next year.
The withdrawal of the administration from further negotiations on another round of fiscal aid is the primary reason for our reducing the fourth-quarter forecast.
But if there is a contested election that bleeds into much of November or December, we would anticipate volatility across asset classes that would dampen overall holiday spending, which is already on track to be the weakest since the fourth quarter of 2008. That scenario may necessitate a further reduction in our forecast.
If the election goes into overtime or there is widespread discontent with the outcome, investors should anticipate market volatility with a particular emphasis on equity valuations and the value of the greenback.
We would anticipate that any feedback into the economy would be transmitted through equity markets, foreign exchange markets, Treasury yields and commodity prices. If the crisis is serious, that could plausibly translate into dollar funding stress and various forms of credit stress.
In that case, we would anticipate negative feedback loops in the economy that would be transmitted through the financial channel, the confidence channel and spending channels with a modest lag. This is part of our rationale for reducing our fourth-quarter GDP estimate to 2.25%.
Given what looks to be a growing probability of a second wave of the coronavirus pandemic, we now attach a 50% probability of a recession over the next 12 months, especially if it is followed by an insufficient fiscal response.
That forecast assumes that the current configuration of power in Washington remains unchanged. Should there be a new administration put in place or a unified government under Democrat auspices then we would expect a robust response to any downturn caused by a second wave.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.