Rising coronavirus infections risk a 'W-shaped' recovery, economists warn

Rising coronavirus infections in large economies such as the U.S., Brazil and India have underlined the fragility of the economic rebound and increased the risk of a "W-shaped" recovery, according to economists at research firm IHS Markit.

In its July World Flash report, IHS Markit Chief Economist Nariman Behravesh and Executive Director of Global Economics Sara Johnson upped their 2020 global growth forecast slightly to a 5.5% contraction, noting clear indications of a sharp rebound in economic activity in May and June, after a very deep and very short recession. A 4.4% rebound is expected in 2021.

"Nevertheless, the logic underlying our forecast, of a 'bounce and fade,' has not changed. Consumers and businesses remain cautious," Behravesh and Johnson said.

"Unless fiscal and monetary authorities provide more stimulus, a key support for the recovery will disappear soon."

Governments and central banks around the world have deployed unprecedented levels of monetary and fiscal stimulus since the crisis began. IHS Markit projected that the euro zone will be the hardest-hit region economically with an 8.6% decline in GDP (gross domestic product) this year. European leaders gathered in Brussels on Friday to begin several days of negotiations over a 750 billion euro ($856.9 billion) coronavirus recovery fund.

However, rising infections in the U.S. remain a key concern, with more than 77,000 new cases confirmed on Thursday, according to Johns Hopkins University data, the highest single-day tally of any country in the world. A number of states have been forced to reimpose partial lockdown measures to contain the virus, but the case total sits at 3.5 million and continues to climb.

Similar localized restrictions have been introduced in a number of Covid-19 hotspots around the world, including Australia, mainland China, Germany, Israel, Japan and Spain. IHS Markit highlighted that high-frequency data on consumer spending patterns have predictably "rolled over," 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 said in the report.

IHS Markit assigns a probability of around 20% to such a scenario, but depending on the pattern of infections, this risk could escalate 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," the report said, citing improved virus management measures meaning less likelihood of widespread lockdowns.

"Bottom line: while the worst is probably behind us, the global recovery remains weak and subject to further downside risks," the report concluded.

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