'Painfully evident' damage: Deutsche Bank now thinks the US economy will shrink by nearly 40% in the 2nd quarter following coronavirus lockdowns

• Deutsche Bank on Tuesday updated its US gross domestic product expectations to a nearly 40% decline in the second quarter. It previously forecast a 13% drop.
• "Since we last updated our outlook for the US economy a month ago, the extent of the economic damage wrought by Covid-19 and the related containment measures has become painfully evident," Matthew Luzzetti, chief US economist wrote in a note.
• The bank also expects a much slower recovery than it had previously forecast.
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Deutsche Bank now expects that lockdowns to curb the spread of COVID-19 will have a more severe impact on the US economy than previously thought.

The firm sees US gross domestic product slumping nearly 40% in the second quarter, Matthew Luzzetti, chief US economist, wrote in a Tuesday note. The bank previously had forecast a 13% slump as part of a severe recession due to the coronavirus pandemic.

In the first quarter, US GDP dropped an annualized rate of 4.8%, the worst performance since the global financial crisis.

"Since we last updated our outlook for the US economy a month ago, the extent of the economic damage wrought by Covid-19 and the related containment measures has become painfully evident," said Luzzetti.

The bank also now expects that a recovery in the second half of the year will be more muted, according to the note. It forecasts GDP to rebound to 15% in the third quarter and 6.5% in the fourth quarter — an overall decline of 8% for the entire year, more than the prior forecast of a 3.2% decline.

First quarter GDP was weighed down heavily by a slump in consumer spending as millions of Americans lost jobs in a wave of coronavirus-induced layoffs. This is likely to continue, according to the report, and pull down second quarter GDP even further.

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In addition, the firm is now banking on a much slower recovery going forward.

"We see more muted rebounds in business spending and trade as firms will likely take time to restart idled capacity, could remain cautious as they reassess underlying demand, and global supply chains suffer more persistent disruptions," said Luzzetti.

Beyond 2020, the bank expects the economy to continue to gain steam as activity begins to normalize. The firm projects US GDP growth of 4.2% in 2021, and 2.7% in 2022.

"We see the economy returning to a more trend-like pace of 2.2% growth in 2023 as real GDP finally recovers its Q4 2019 level in the back half of that year," Luzzetti wrote.

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