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

• S&P 500 Index Weekly Forecast: Nothing but blue skies from now on?

DXY crumbles supporting a bid in the EUR

• The Chart of the Week: EUR/USD to complete a reverse H&S prior to next leg higher?

DXY bears in control: