Economic downturn
Even as several countries seem to have contained the severity of the COVID-19 outbreak, a resurgence in new cases in a few large nations have raised the risks of another global economic downturn. Image Credit: Istock

Dubai: Even as several countries seem to have contained the severity of the COVID-19 outbreak, a resurgence in new cases in a few large nations have raised the risks of another global economic downturn.

“Rising COVID-19 virus infection rates have increased the risk of a W-shaped economic cycle,” revealed Nariman Behravesh and Sara Johnson, global economists at IHS Markit. (A ‘W-shaped’ recovery is when any economy passes through a recession into recovery and then immediately turns down into another recession.)

With the global economy currently in its deepest recession since World War II, there was earlier reason for hope, with the global economic impasse seen ending in record time. While the view still stands, there is now a chance that the recovery may be brief, ahead of another downturn or a brief recession spell.

Rebound may not last

In May and early June, there were clear indications of a sharp rebound in economic activity, after a very deep and very short recession, according to IHS Markit, which publishes widely watched surveys of business and economic activity seen worldwide. But now with a renewed spike in new coronavirus infections seen in different parts of the world, the rebound may not last for long.

However, the data analytics firm has upwardly revised its forecast for global growth in 2020 slightly, with world real GDP now expected to contract 5.5 per cent this year, followed by a 4.4 per cent recovery in 2021. A month earlier, GDP was projected to decrease 6 per cent in 2020, which was more than three times the 1.7 per cent contraction in 2009 during the Global Financial Crisis.

“Nevertheless, the logic underlying our forecast, of a ‘bounce and fade’, has not changed. Consumers and businesses remain cautious. Unless fiscal and monetary authorities provide more stimulus, a key support for the recovery will disappear soon.”

Renewed spike in cases

“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.”

The COVID-19 contagion and the subsequent stringent lockdown measures that followed have evidently thrown the world economy in turmoil. Even as countries reopen, economists had been warning how the globe is currently undergoing its deepest global recession in a couple of decades short of a century.

But recently, in the US, a “social-distancing fatigue” has led to some large US states, like Arizona, California, Florida, and Texas, to open up rapidly, leading to a surge in infections, the economists explained, while adding other Northeastern US states that have opened up more slowly, the spread of the virus has been limited.

More partial lockdowns

The hardest-hit states in the US have begun to re-impose selective bans on people going to bars, restaurants, and theaters. Similar partial lockdowns have been put in place in other virus hotspots around the world, including Australia, mainland China, Germany, Israel, Japan, India, and Spain.

“Predictably, high-frequency data on consumer spending patterns have ‘rolled over’, signaling a renewed increase in consumer caution,” the economists added.

“The new wave of infections has reduced the probability of a V-shaped cycle … and increased the risk of a double-dip recession (W-shaped cycle). We currently assign a probability of around 20 per cent to such a scenario.”

May not be as severe

While the risk of another recession can be added to the books, if cases persistently rise going forward, there is but hope that the upcoming recession may not be as severe as the first one.

“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.”

“Virus management has improved, and widespread lockdowns will probably not be necessary. Bottom line: while the worst is probably behind us, the global recovery remains weak and subject to further downside risks.”