A new report from IHS Markit warns that rising COVID-19 virus infection rates have increased the risk of a W-shaped or double-dip global economic cycle and a second recession.
“IHS Markit has upwardly revised its forecast for global growth in 2020 slightly,” Nariman Behravesh, chief economist at IHS Markit, and Sara Johnson, executive director of global economics, said in their report.
They noted that world real gross domestic product (GDP) is now expected to contract 5.5 percent this year, followed by a 4.4 percent recovery in 2021.
“Nevertheless, the logic underlying our forecast of a ‘bounce and fade’ has not changed,” the economists wrote. “Consumers and businesses remain cautious. Unless fiscal and monetary authorities provide more stimulus, a key support for the recovery will disappear soon. Most troubling of all, the recent rise in COVID-19 virus infection rates in large countries, including the United States, India and Brazil, underlines the fragility of the rebound and the risk of a W-shaped cycle.”
IHS noted that in May and early June, there were definite indications of a sharp rebound in economic activity, after a deep and short recession. One measure was the steady rise in the IHS Markit Materials Price Index since the beginning of May. Another was the significant uptick in the JP Morgan Global Composite Output Index compiled by IHS Markit from a record low of 26.2 in April to 36.3 in May and 47.7 in June. Other, higher frequency data such as Google mobility reports and daily credit card usage confirmed the early resurgence in activity.
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In the U.S., the report said “social-distancing fatigue” led some large states, including Arizona, California, Florida and Texas, to open up rapidly, leading to a surge in infections. Other states, notably in the Northeast, have opened up more slowly, limiting the spread of the virus.
The hardest-hit states have begun to reimpose selective bans on people going to bars, restaurants and theaters, while similar partial lockdowns have been put in place in other virus hotspots around the world, including Australia, China, Germany, Israel, Japan and Spain, IHS noted. High-frequency data on consumer spending patterns have “rolled over,” the report said, signaling a renewed increase in consumer caution.
“The new wave of infections has reduced the probability of a V-shaped cycle, something to which IHS Markit did not subscribe, and increased the risk of a double-dip recession (W-shaped cycle),” Behravesh and Johnson wrote. “We currently assign a probability of around 20 percent to such a scenario. Depending on the pattern of infections, this risk could rise in the coming months. The likely timing of a second downturn would be late this year or early 2021 and the economic contraction would probably not be anywhere near as severe as the recession we just went through.”
They said virus management has improved and widespread lockdowns will probably not be necessary. The Centers for Disease Control said this week that the best way to make sure that doesn’t happen and to keep the coronavirus under control is widespread use of facial coverings.
The economists said the bottom line is that “while the worst is probably behind us, the global recovery remains weak and subject to further downside risks.”