By Ray Birch
ARLINGTON, Va.—Forecasting the effect of the coronavirus COVID-19 on the economy and credit unions, a pair of economists is urging CUs to recognize net interest margins will be under new pressures, and “knee-jerk reactions” need to be avoided. Indeed, the best strategy, said one person, will be for CUs to get back to their roots.”
CUNA Senior Economist Mike Schenk and NAFCU Chief Economist and Vice President of Research Curt Long told CUToday.info there remain significant unknowns in predicting how the pandemic will ultimately affect the economy, including the duration of the downturn. But both economists also see some plusses that will minimize the fallout.
While most coronavirus news stories alarm the public, NAFCU’s Long, who developed a new brief to help credit unions understand the current economic situation and potential implications, offered at least one positive, saying the strength of the economy prior to the outbreak of the virus should help the U.S. weather the storm better than had the economy been in a weaker state.
“However, responses to address the coronavirus threat and added headwinds due to its uncertainty will have large impacts on the economy,” Long said. "In the near term, NAFCU expects a sharp slowdown to the economy in the second and third quarters, at a minimum."
Long emphasized a recession is a distinct possibility.
“It remains an open question whether we should expect a rapid recovery once the worst is over—i.e., a v-shaped recovery,” he said. “While that would be typical of a natural disaster, those events do not typically hang in the psyche of the consumer."
Curt Long
The Advantages
Long outlined some advantages the U.S. has compared to other countries in dealing with the virus:
- Financial institutions are as strong as any and more highly capitalized than at any point in recent history
- The U.S. remains the safest haven in the world, and any expansion in the fiscal deficit will be serviced at exceedingly low rates
- The U.S. and others will be watching and taking notes as countries like China and South Korea, who were on the leading edge of the spread of the virus, transition from containment and mitigation back into regular economic life
For credit unions, Long said experiences will vary, but all will ultimately be affected to some degree.
"Certain credit unions are likely to be hit harder by the economic and financial impact of the coronavirus than others," Long said. "Those located in areas heavily dependent on oil production or those in vacation or conference destinations (Las Vegas, Orlando) may struggle for a time. Depending on how the virus responds to warmer weather, your region’s climate may play a role.”
Long added credit unions located in denser urban areas should plan on seeing a bigger effect from the virus than those in rural areas, where members and staff can more easily limit close contact with others.
“Finally, given that social distancing may be part of the response to the coronavirus threat, those credit unions that have invested in technology in recent years and have robust digital offerings are better placed to continue to serve their members in the coming months," Long said.
Long reminded credit unions that "operational considerations are paramount" and is pointing institutions to the Federal Financial Institutions Examination Council's (FFIEC) recently released guidance for pandemic preparedness planning, as well as NAFCU's resource page on the coronavirus (updated regularly) and networks to connect with other credit union professionals on issues that arise.
Lingering Effects
CUNA’s Mike Schenk also emphasized the economy, entering what is expected to be a downturn, is doing so in a position of strength.
“That was not the case before the Great Recession,” said Schenk. “We are starting this downturn in a position of relative strength.”
Schenk told CUToday.info he expects the downturn to be short, but have lingering effects.
He noted CUNA had forecast 1.8% GDP this year but expects that figure to decline to approximately 1% by year-end 2020 as a result of widespread effects across the economy.
“We have spoken with health experts who believe the coronavirus will likely die out sometime in July,” Schenk said. “So, looking back on this, I believe we will all see this as something pretty traumatic, but something that was not long-lived.”
Mike Schenk
The unemployment rate will rise, at least temporarily, as many people lose their jobs in the near term, noted Schenk, who agreed with Long the impact on businesses and people will be felt based on location of the country and the industry they serve.
Consumer Balance Sheets
But consumers, with their solid balance sheets and confidence, have been the bright spot in the economy leading up to the pandemic, Schenk said, noting consumers have represented 70% of economic activity overall.
“Debt, as percentage of income, at the moment is close to 90%,” pointed out Schenk. “It was closer to 125% of income when the real estate bubble was forming in 2007. And, because rates are coming down to near zero, the amount of money people are spending to satisfy their debt is at an all-time low.”
Schenk further noted the housing sector is in much better shape today than it was in previous economic expansions.
“That is great news for the economy now,” he said.
Credit unions, particularly those located in areas that will be hardest hit by COVID-19, and those that serve members working for industries likely to be greatly affected by the pandemic, will feel the economic effects from the downturn longer. Schenk stated all credit unions will face increasing deposits and a lending slowdown—outside of mortgages—with very low-paying investments likely the home for many of the extra dollars.
“So net interest margins will be under pressure going forward,” he said.
Schenk cautioned CUs to not make any knee-jerk reactions and try to “reverse the problems. Just get back to your roots of being credit unions and be more thoughtful—think about way you acted during the Great Recession and act that way in the coming months.”