The risk of a US double-dip depression is real
Reopening states to boost the economy despite the scientific evidence will do more damage than good
If you think one lockdown is painful enough, imagine a second. It is too soon to gauge the lasting impact of putting the US economy into a deep freeze for weeks. But it will be very hard for consumers and businesses to shake off a lingering sense of risk aversion. The shock of a second wave of sheltering-in-place would be orders of magnitude worse. Twice bitten, multiply shy. Given the choice, no self-preserving leader would take risks with the spectre of another outbreak later this year.
Yet the temptation to go for a V-shaped recovery before the November election looks too great for Donald Trump. Publicly discussing prospects of a second outbreak is now banned among US government scientists. On Wednesday, Mr Trump effectively gagged Robert Redfield, head of the Centers for Disease Control, after he warned of a second — and worse — round of coronavirus infections this coming winter. What Mr Redfield had meant to say was that every American should get their regular flu injections, the White House explained.
Several states, including Florida, South Carolina and Tennessee are already relaxing stay-at-home orders. Tattoo parlours, cinema complexes and bowling allies are apparently now safe to visit in Georgia. In reality, such venues are ideal for super-spreaders. In the trade-off between growth and health, reopening the economy too soon achieves neither. Scientists warn such measures will sharply increase the chances of a second wave of coronavirus.
That, in turn, would trigger another instant depression. Economists point out that the US is not even in a recession, which is defined as two consecutive quarters of negative growth. Yet JPMorgan forecasts that the US economy will shrink by 40 per cent in the second quarter. American unemployment is likely to hit 20 per cent when the April number comes out next week. In reality, the US economy is already in depression. Nothing on this scale — and at this speed — has been seen since the Great Depression in the early 1930s. It took the second world war to dig the US out of that. It will take a vaccine, or a miracle prophylactic, to stop America’s first depression in almost a century.
The country to watch is China. Its rules are being set as much by citizens as government. China’s restaurants are sparse. Few people are flying. And many people only leave home for essential tasks. The Chinese, in other words, are sticking to a semi-formal lockdown. To judge by US poll numbers, most Americans are in a similar mood. Mr Trump may believe he can press a button to switch the US economy back on. In practice, he cannot force consumers to swallow their fears. The more the president talks about the coronavirus — an average of roughly 90 minutes a day — the less Americans trust what he is telling them.
China’s task is arguably easier than America’s. Its economy is far less dependent on consumer spending than the US’s. In theory, China could have all its manufacturing operations back to capacity by June. In practice, however, their order books are unlikely to be filled. As the world moves into its first global contraction since the second world war, that is unlikely to change. Whatever tepid growth China achieves will largely come from government stimulus.
The ideal would be for the US and China to work together to contain the virus. Given their mutual hostility, that is almost impossible to imagine. Even if the US reopened without triggering another epidemic, much of the rest of the world will remain on lockdown. Parts of it, including Sub-Saharan Africa and Latin America, are facing their worst economic crises in decades. It would be fanciful to suppose business travel and tourism will return to pre-pandemic levels. Some countries will impose 14-day quarantines on all incomers, which would effectively kill about 90 per cent of trips. Others will be too risky to visit.
It is possible the world could create a vaccine in record time. History, meanwhile, is likely to be on Mr Redfield’s side. Most epidemics have several waves. The second bout of the Spanish flu in winter 1918 was far worse than the first one the previous spring. For the time being, the best the US can hope for is a modest U-shaped recovery with gentle starts and stops. Given the alternative — the spectre of another instant depression — aiming for a V-shaped resurrection is reckless.