Some degree of social distancing is expected to continue through the first half of 2021, the CBO said.
The economy is likely to shrink 12% in the second quarter—a 40% drop if it were to persist for a year—and the jobless rate will average 14%, the nonpartisan research service said Friday. Job losses will come to 27 million in the second and third quarters.
The federal budget deficit is expected to reach $3.7 trillion by the end of the fiscal year on Sept. 30, the CBO said, up from about $1 trillion in the 12 months through March. Congress has authorized unprecedented deficit spending to offset the shutdown of vast swaths of the U.S. economy.
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As a proportion of gross domestic product, the deficit will end the fiscal year at almost 18%, its highest level since the year after World War II ended and up from 4.6% in 2019, the CBO said.
Federal debt held by the public is projected to hit 101% of gross domestic product by the end of the fiscal year, up from 79% at the end of fiscal 2019, the CBO said.
The silver lining is that interest rates are projected to fall so low that the government’s net borrowing costs will decline even with the dramatic increase in borrowing, the CBO said. It sees the yield on 10-year Treasury notes hovering at 0.7% in the second half of this year and through 2021.
The updated forecasts, published in a blog post by CBO Director Phillip Swagel, rest on assumptions that are “subject to enormous uncertainty.” These include the extent to which the coronavirus is brought under control in the coming months and the possibility of a subsequent re-emergence.
Some degree of social distancing is expected to continue through the first half of 2021, the CBO said. But those measures are projected to diminish by roughly 75% in the second half of this year relative to the April-June quarter and continue easing into 2021.
As a result, economic activity is projected to recover from its current nadir, but only gradually. GDP is expected to contract 5.6% in 2020 from last year and to grow 2.8% in 2021.
The unemployment rate is seen topping out at 16% in the third quarter and declining to 9.5% by the end of 2021. But the CBO cautioned that those numbers understate the extent of damage because they only count people who are actively looking for a job.