Double-dip Recession: A possibility in the US? 

Summary

• The resurgence of COVID-19 cases in some nations worldwide along with the US has sparked fears and risk of another global economic downturn.
• The rapid acceleration of coronavirus cases in the US is threatening the economic recovery of the country.
• The July World Flash report stated that there is a risk of a double-dip recession or W-shaped recovery due to new wave of infections.
• According to IMF, the US economy is expected to shrink by 6.6% in 2020.

While many countries around the world seem to have curtailed the magnitude of the COVID-19 pandemic, a spike in new infections has increased chances of another global economic crisis in a few major nations.

As the global economy is facing its deepest recession since World War 2, there are increasing predictions of a short rebound ahead of another slowdown or a brief period of recession.

Recession refers to 2 consecutive quarters of decline in real GDP. Economic growth in a country reflects more jobs, the profitability of companies and payment of dividends and more money with the government in the form of taxes paid by people. However, things reverse when an economy plunges. Most of the countries contracted during the January to March quarter when coronavirus started with its ravaging impact.

According to International Monetary Fund (IMF), the world economy is expected to decline by 3% in 2020. The COVID-19 contagion and the resulting strict shutdown measures have together thrown the world economy into a turmoil.

The reopening of major large states in the US have led to a surge in virus cases in the country, and as a consequence, selective bans on people going to bars, restaurants and theatres have been re-imposed. Partial lockdowns have been declared in countries like Australia, Germany, mainland China, Japan, etc.

The US economy could face a double-dip recession

The business cycle dating committee, NBER (National Bureau of Economic Research) officially stated that the US economy had entered recession triggered by coronavirus pandemic on 8 June. NBER further mentioned that the economic activity and employment in the US had peaked in February this year before dropping down, putting an end to a decade long economic expansion.

The US economy plunged by 5% in the initial 3 months of 2020, and about 22 million jobs were slashed in March and April, as restrictions on movement to control the virus spread led many businesses to shut down.

Coronavirus has affected more than 3.5 million people in the US and has taken away 143,289 lives, as on 20 July. The infection rate is still soaring in 42 out of 50 US states with the country losing ~5,000 people per week. The US has witnessed a resurgence of coronavirus cases from late June that had been decelerating the rate of its economic recovery.

The performance of some key economic indicators for the US are as follows:

• The unemployment rate fell to 11.1% in June from 13.3% in May, while nonfarm payrolls surged by 4.8 million in June, which is the largest gain since the US government started keeping records in 1939, as the nation’s economy reopened.
• According to a survey, about 4.8 million jobs were added in June, with an increase in employment in industries like leisure, hospitality, retail, manufacturing and healthcare, as businesses reopened.
• However, the resurgence of new virus cases in late June and early July forced states to reimpose restrictions on the economic activity, due to which many jobs are expected to be lost in July.
• The jobs market is already facing headwinds as about 1.3 million people applied for unemployment insurance claims in the week ending 11 July.
• Budget deficit hit a record high of US$864 billion in June, as the US government’s spending on programs to overcome coronavirus induced recession surged, along with the decision to delay tax payments until 15 July.

Recently, IMF predicted that the US economy will plunge 6.6% in 2020 due to COVID-19 and measures to curb it, revising its earlier forecast of 8%. However, the Fund also cautioned that the economy faces downside risks from the resurgence of virus cases.

The Trump administration forecasted that the US economy would bounce back in the second half of 2020, but the resurgence of virus cases can halt consumers from resuming spending amid coronavirus fears.

The rise in COVID-19 cases in the US could trigger a double-dip recession, which is a recession followed by short-lived recovery and followed by another recession.

W-shaped recovery expected amid rising virus cases

Global infection rates have surpassed 14.5 million coronavirus cases, with over 609k deaths all over the world till date. The persistent spread of COVID-19 has cast a cloud over investors’ sentiment.

Worldwide, central banks and governments have deployed massive stimulus measures to support their respective economies from the economic fallout caused by COVID-19. Eurozone is predicted to be the worst-hit area witnessing 8.6% drop in GDP in 2020, according to IHS Markit.

ALSO READ: Bells ringing around a Technical Recession for Economies across the Globe

Nariman Bharavesh, Chief Economist at IHS Markit and Executive Director of Global Economics Sara Johnson in their July World Flash report, have increased their global growth prediction slightly to a 5.5% reduction after noting a steep bounce back in the economic activity during May and June post quite brief recession.

They have stated that the rising coronavirus cases in large economies like the US, Brazil and India have highlighted the weakness of the economic rebound and amplified the risk of W-shaped recovery.

They further stated that the second downturn could happen in late 2020 or early 2021 with economic contraction to be much less severe than the one witnessed in June due to better and improved virus management measures.

Also, IHS Markit assigned a possibility of 20% to such a situation and warned that the risks could intensify, contingent on the pattern of infections.

Global recovery is still at risk even though the worst is over for several economies around the world.