The Pandemic’s Long Economic Shadow

While mass vaccination points to an end to the COVID-19 pandemic in the next year or so, it does not provide immunity against longer-term economic damage. And research on the aftermath of previous pandemics suggests that the impact on supply and demand is likely to be far-reaching and profound.

NEW HAVEN – The outlook for economic and financial markets hinges on the interplay between two cycles – the COVID-19 cycle and the business cycle. Notwithstanding the true miracles of modern science that we are now witnessing, the post-pandemic economy is in need of more than just a vaccine. Extraordinary damage was done by last spring’s lockdown. Now, a second and more horrific wave of the coronavirus is at hand – not dissimilar to the course of the 1918-20 influenza outbreak.

In the United States, the adverse economic repercussions are evident in mounting jobless claims in early December and a sharp decline in retail sales in November. With partial lockdowns now in place in about three-quarters of US states, a decline in economic activity in early 2021 seems likely.

The history of the US business cycle warned us of the possibility of a double dip. Eight of the last 11 recessions featured just such a pattern. Yet financial markets still made a big bet on a V-shaped recovery. Investors were lulled into a false sense of complacency by reading too much into the dead-count bounce of a 33% annualized surge in real GDP in the third quarter, as initial lockdowns were lifted. But reopening after a sudden stop hardly qualifies as a self-sustaining economic recovery. It is more like a fatigued swimmer gasping for air after a deep dive.

The source of the coming economic relapse hardly comes as a surprise. It is the echo effect of the first wave of COVID-19. Despite extraordinary breakthroughs in vaccines, therapeutics, and treatment protocols, the second wave is far worse than the first in terms of infection, hospitalization, and death rates. While the new restrictions on economic activity are not as tight as those last April, they are already having an adverse impact on aggregate economic activity. The double dip of early 2021 will be a painful reminder of the lingering vulnerability of the US business cycle in the aftermath of a major recessionary shock.

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Πηγή: project-syndicate.org