Spiking COVID cases raise risk of a W-shaped economic cycle with a 2nd downturn, IHS Markit says

  • The renewed spread of coronavirus in the US raises the potential for a lengthened recession, according to economists at research firm IHS Markit.
  • The team slightly improved their forecast for global growth, projecting a 5.5% contraction in 2020 before a 4.4% bounce in 2021.
  • IHS still sees global GDP resembling a "bounce and fade," but soaring COVID-19 case counts "increased the risk of a double-dip recession."
  • A W-shaped economic cycle "would probably not be anywhere near as severe as the recession we just went through," the economists added.
  • Strict containment efforts and new fiscal and monetary stimulus is likely needed to avoid a second plunge, IHS said.
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A resurgence of coronavirus infections throughout the US is ratcheting up the risk of a second economic downturn before a more robust recovery, according to economists at IHS Markit.

The research firm slightly improved its outlook for global gross domestic product, raising its forecast to a 5.5% contraction in 2020. IHS also sees the world economy growing 4.4% in 2021. Economists Nariman Behravesh and Sara Johnson still see the global trend resembling a "bounce and fade," yet soaring case counts and their effect on consumer confidence could reverse much of the economy's gains.

"The new wave of infections has reduced the probability of a V-shaped cycle, something to which we did not subscribe, and increased the risk of a double-dip recession (W-shaped cycle)," the team wrote in their mid-July report, adding they see a 20% chance of such a trend taking place.

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The US has seen the bulk of the virus' revival. Large states including California, Florida, and Texas reinstated some restrictions after reopenings prompted fresh outbreaks. Similar measures have been implemented around the world, with Australia, China, Germany, and Spain facing an uptick in case counts.

If the pattern continues and countries are unable to curb the virus' renewed spread, a second economic downturn could arrive in late 2020 or early 2021, the economists said. A W-shaped trend would erase much of the progress made through the second and third quarters, but "would probably not be anywhere near as severe as the recession we just went through," they added.

The firm also highlighted the importance of new fiscal and monetary stimulus to bridge the economic slump. Key relief efforts in the US including expanded unemployment benefits and the Paycheck Protection Program are nearing expiration, and Democratic and Republican lawmakers have only just started moving forward on a second spending package. With consumers and businesses still wary, a lack of new relief measures could raise the odds of a second economic plunge, the team wrote.

"Virus management has improved, and widespread lockdowns will probably not be necessary," IHS said. "While the worst is probably behind us, the global recovery remains weak and subject to further downside risks."

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