fxs_header_sponsor_anchor

News

US COVID-19 surge could trigger a double-dip recession – FT

US COVID-19 surge could trigger a double-dip recession, according to a report in the Financial Times.

Markets are ignoring the possibility that severe lockdowns may be needed in many states

Key notes

  • So far, the US policy response has been muted, certainly compared to nationwide lockdowns in other countries in March.
  • Markets remain surprisingly relaxed, reportedly because investors are optimistic that an effective vaccine from the Oxford university or Moderna trials may be “within sight”.
  • But even the most favourable outcome in vaccine development would come too late to save the US economy from the spread of the virus over the next three months.
  • Unless public policy can control the rate of infections across the American sunbelt, there could be adverse consequences for any US economic recovery over the rest of this year.
  • Consensus economic forecasts have not yet given much weight to this increasing risk, although the US Federal Reserve is increasingly worried.
  • Fulcrum economists have developed a new model. It suggests that the virus’s effective reproduction number, known as R, is now above the critical level of 1 in all but five of the US’s 50 states.
  • Weighted by gross domestic product, this means that 95 per cent of the US economy is affected by a viral reproduction rate high enough to cause an exponential rise in the number of cases — unless something intervenes to prevent this.
  • This spread of R levels above 1 is the broadest it has been since the epidemic started.
  • In March, absolute levels of R were higher in the northeast, when the reproduction rate exceeded 3 for several weeks and infection numbers doubled every few days.
  • The key economic question now is how much damage to activity will be incurred as policy lockdowns and voluntary social distancing bring the epidemic under control.
  • So far, the answer is very little.
  • Fulcrum economists have modelled an alternative scenario where full lockdowns are eventually needed in states where the R is currently above 1.5, with partial lockdowns in states where R lies between 1.25 and 1.5, and no lockdowns elsewhere.
  • This would lead to a large drop in activity — in effect, a double dip — of about 7 percentage points through the whole economy while the lockdowns last. If the situation persisted for three months, it would knock almost 2 percentage points from this year’s growth rate, compared to the latest consensus forecasts.
  • This double-dip may not be the most likely outcome, right now. But is a highly plausible worst-case scenario if the national spread of the virus is not brought under control soon.

Market implications

DXY crumbles supporting a bid in the EUR

DXY bears in control:

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.


RELATED CONTENT

Loading ...



Copyright © 2024 FOREXSTREET S.L., All rights reserved.