America must brace itself for a double-dip economic recession
- Financial markets’ optimism about a V-shaped recovery from Covid-19 is not supported by the history of the US business cycle
- With America still struggling to contain the pandemic, the lingering fears of infection will continue to impede any lasting recovery
The double dip is not a dance. It is the time-honoured tendency of the US economy to relapse into recession after a temporary recovery. Over the years, it has happened far more often than not. Notwithstanding frothy financial markets, which currently are discounting an uninterrupted V-shaped recovery, there is a compelling case for another double dip in the aftermath of America’s devastating Covid-19 shock.
The daunting history of the US business cycle warns against complacency. Double dips – defined simply as a decline in quarterly real GDP following a temporary rebound – have occurred in eight of the 11 recessions since the end of World War II. The only exceptions were the recessions of 1953-54, the brief contraction of 1980, and the mild downturn of 1990-91. All the others contained double dips, and two featured triple dips – two false starts followed by relapses.
The double dip reflects the combination of lingering vulnerability in the underlying economy and aftershocks from the initial recessionary blow. As a general rule, the more severe the downturn, the greater the damage, the longer the healing, and the higher the likelihood of a double dip.
That was the case in the sharp recessions of 1957-58, 1973-75, and 1981-82, as well as in the major contraction that accompanied the 2008-09 global financial crisis.
The current recession is a classic set-up for a double dip. Lingering vulnerability is hardly a question in the aftermath of the 32.9 per cent annualised plunge in the second quarter of 2020 – by far the sharpest quarterly decline on record. Damaged as never before by the unprecedented lockdown to combat the initial outbreak of Covid-19, the economy has barely begun to heal.