US economy set to shrink 38% in Q2 and won't fully rebound until after 2021, CBO says

The country's economy will start regaining some lost ground in the third quarter of this year, new report says

NEW YORK, NY - MAY 08: An 'open' sign sits on the ground outside of a closed store as the coronavirus keeps financial markets and businesses mostly closed on May 08, 2020 in New York City. The Bureau of Labor Statistics announced on Friday that the US economy lost 20.5 million jobs in April. This is the largest decline in jobs since the government began tracking the data in 1939.   Spencer Platt/Getty Images/AFP

The US economy should bounce back sharply in the third quarter after its deep coronavirus-related collapse, but it will not fully recover lost ground until sometime after next year, the non-partisan Congressional Budget Office said on Tuesday.

In an updated economic forecast, the CBO projected the economy would contract at a 37.7 per cent annual rate in the second quarter, but expand at a 21.5 per cent pace in the July-September period.

Even so, US gross domestic product will not return to its heights from the start of this year within the forecast period that runs through the end of 2021, the agency predicted.

With much of the nation shut down to halt the spread of the novel coronavirus, the economy has taken its biggest hit since the Great Depression of the 1930s.

A staggering 20.5 million people lost their jobs in April, as the unemployment rate jumped to 14.7 per cent, a post-Second World War record, from 4.4 per cent in March.

The CBO said it expected the jobless rate would hit a peak in the third quarter and projected it would average 15.8 per cent.

While it forecast a steady decline from there, it cautioned that the recovery would be prolonged.

"The persistence of social distancing will keep economic activity and labour market conditions suppressed for some time," the CBO said.

Even by the fourth quarter of 2021, the jobless rate would likely remain at a relatively lofty 8.6 per cent, with the level of employment still below where it stood at the start of this year, it said.

The economy contracted at a 4.8 per cent rate in the January-March quarter. Output is expected to contract at as much as a 40 per cent pace in the second quarter, the deepest since the 1930s.