By Ray Birch
MADISON, Wis.—Depending on how long the threat continues to grow, the coronavirus and fears around a global pandemic could push the country toward a recession few credit unions have planned for, according to economists who are urging financial institutions not to pull back on lending and worsen the situation.
And how the situation plays out could affect certain fields of membership more than others.
Economists who spoke with CUToday.info say the coronavirus’ effects on industrial production, the supply chain, international travel and more could push an economy already facing challenges into a downturn before anyone really expected it. On the other hand, should the number of cases peak and U.S. health experts indicate the threat is receding, the coronavirus may only shave a bit from U.S. economic performance. As recently as yesterday, stock markets were showing signs of a rebound.
The coronavirus has infected 90,000 people worldwide and killed more than 3,000, mostly in China. As of the filing of this story, more than 100 people have been infected with the virus in the U.S., with six deaths to date.
“I do expect what I call a growth recession this year, where we still have positive economic growth, but it's so low, maybe even below 1%,” said CUNA Mutual Group’s chief economist Steven Rick. “We’ve got the trade war with China, slower growth in Europe with Brexit, and there is the uncertainty from the election—so some firms are just holding off business investments until the election's over. The coronavirus could be the straw that breaks the camel's back—just one more thing on top of everything.”
Rick emphasized the effect fears related to coronavirus are having on Americans.
“This is like adding another weight to weights a marathon runner is already carrying,” said Rick. “You keep putting weights on the runner and pretty soon that runner is slowing down and can’t move.”
Steven Rick
Rick, like many other experts, predicts consumers will cut back on leisure, sports and entertainment activities outside of the home.
“People stop going out to restaurants. They don't go to the fitness club because they don’t want to be next to the guy sneezing on the treadmill. People stop going out in public as much. Tourism businesses, airlines, and leisure and hospitality businesses are going to take a good hit this year,” Rick said.
The Real Economic Killer
Uncertainty is the economic killer right now, said Rick—uncertainty about the coronavirus and its spread and uncertainty about making decisions in such an environment.
“It’s possible this could just blow over in a month and you won’t see all the news stories about the coronavirus anymore,” said Rick. “Or, this could turn into a pandemic. Whenever people face massive uncertainty, they just pull back. They postpone and delay bigger decisions, and they wait on any major purchase, like a new car.”
If the coronavirus becomes a pandemic, Rick believes credit unions will feel the effects first in loan growth, and auto loans and home equity specifically, he said.
“Auto loan growth will slow even further,” said Rick. “Credit unions are already down in this area, down to about 6.5% for the industry in 2019, which is far below the 11% annual loan growth we had previously enjoyed for a number of years. The coronavirus will just amplify the situation—it’s coming on the downside of the lending cycle.”
As far as the coronavirus impacting CU operations, Rick believes the industry is ready.
“If this becomes a pandemic, I believe credit unions are very well prepared,” said Rick. “Their pandemic and disaster planning is strong. Credit unions are ready to have staff work from home to limit the exposure. They have backup computers and backup space…”
A Tipping Point
Like Rick, Michael Moebs, economist and CEO at Moebs $ervices, sees the coronavirus as tipping an economy facing headwinds toward real trouble and a recession.
“The coronavirus is the very hair breaking the global economy’s back,” said Moebs. “This virus is the final piece of a perfect storm. An economic perfect storm is a rare combination of adverse and unpredictable business and consumer factors.”
Moebs said the perfect storm today is:
- A disease that drives many people to remain in their homes, reducing retail sales and business output
- A 10-year bull run in the U.S. stock market, the longest in history, destined to end, hurting capital investment and labor
- A huge shortfall in money stock, which curtails greater economic monetary expansion
- Funds deposited for short-term durations for way too long masking another potential Great Recession
“The last U.S. economic perfect storm arrived before the Great Recession, in 2008, and before 9/11 in 2001,” said Moebs. “The examples of the 9/11 tragedy and the Great Recession provide insight into what may come in 2020.”
Triggering Economic Issues
Michael Moebs
Moebs noted both events triggered economic issues for about 12 to 24 months.
“People stopped traveling; home was the haven,” Moebs said. “The consumer-driven economy suffered as in-person consumption of retail goods, restaurants, clothing and sporting events fell dramatically. Schools closed. Workers worked remotely from home or did not go to work. Deposits moved heavily to short term. Underwriting got very conservative, reducing loan volume and liquidity. Auto and home sales fell. Fees on deposits and other fees increased to make up for shortfalls in revenue.”
Moebs pointed out that social media boomed and Internet sales increased during the Great Recession.
Moebs outlined steps the Federal Reserve needs to take, and lenders, as well, to mitigate the impact of consumer behavior changing due to the coronavirus.
Need for Fed Statement
“The Federal Reserve must act and lead quickly and respond in a fashion similar to natural disasters,” said Moebs. “The Fed should issue a statement now to all banks, credit unions, and government agencies assuring as much liquidity as is needed is readily available to keep loans flowing and markets opened as normal. Liquidity is key.”
Many analysts had forecast that any economic slowdown caused by the coronavirus will lead the Fed to cut rates. The Federal Reserve during its March meeting Tuesday announced it is cutting rates by 50 basis points--to a target range of 1.00% to 1.25%--in an emergency move designed to shield the world's largest economy from the impact of the coronavirus.
Moebs emphasized what may be coming down the road is not a credit crisis, which occurred during the Great Recession.
“Yet, it could be if banks, credit unions and all government agencies cease to lend or become risk averse by significantly restricting underwriting standards,” said Moebs. “Specifically, education- and teacher-based credit unions could be hit hard with school closings, (and there will be a) need to ensure lending help is available to those immediately impacted, as well as to provide extra support with existing borrowers who face cash-flow hardships.”
International Liquidity Essential
Moebs added international liquidity—keeping trade flowing in transportation, supply chains, and distribution channels—is essential.
“The next 60 to 90 days are critical for the U.S. to contain the coronavirus and minimize the virus’ impact until spring and warmer weather arrives to dilute the virus,” said Moebs. “Financial institutions can lead in the efforts to help fight the financial impacts of the coronavirus by keeping credit open, accommodating user behavior by expanding remote and digital transactions and providing funds to help low-income and hard-hit consumers. These steps dilute this event from a pandemic to a controllable epidemic and shortens the economic perfect storm.”
On the West Coast, where the coronavirus has killed six people in Washington State, Chris Call does a pandemic.
“We are monitoring the news reports about the virus but are not overly concerned yet about its spread here in Northern California,” Call, CEO of the $68-million North Bay CU in Santa Rosa, Calif., told CUToday.info. “We are prepared to have staff work from home if necessary, but right now we’re thinking the news reports are making the threat seem worse than it really is—hyperbole always sells better than the mundane.”