Stephen Roach points out that while a COVID-19 vaccine promises a spring of hope, a winter of despair is coming first for the US

Stephen Roach points out that while a COVID-19 vaccine promises a spring of hope, a winter of despair is coming first for the US

Suddenly, there is a credible case for a vaccine-led economic recovery. Modern science has delivered what must certainly be one of the greatest miracles of my long lifetime. Just as COVID-19 dragged the world economy into the sharpest and deepest recession on record, an equally powerful symmetry on the upside now seems possible.

If only it were that easy. With COVID-19 still raging – and rates of infection, hospitalisation, and death now spiraling out of control (again) – the near-term risks to economic activity have tipped decidedly to the downside in the United States and Europe. The combination of pandemic fatigue and the politicisation of public health practices has come into play at precisely the moment when the long anticipated second wave of COVID-19 is at hand.

Unfortunately, this fits the script of the dreaded double-dip recession that I warned of recently. The bottom-line bears repeating: Apparent economic recoveries in the US have given way to relapses in eight of the 11 business cycles since World War II. The relapses reflect two conditions: lingering vulnerability from the recession, itself, and the likelihood of aftershocks. Unfortunately, both conditions have now been satisfied.

Vulnerability is hardly debatable. Notwithstanding the record 33% annualised snapback in real GDP growth in the third quarter of this year, the US economy was still 3.5% below its previous peak in the fourth quarter of 2019. With the exception of the 4% peak-to-trough decline during the 2008-09 global financial crisis, the current 3.5% gap is as large as that recorded in the depths of every other post-WWII US recession.

Consequently, it is ludicrous to speak of a US economy that is already in recovery. The second quarter snapback was nothing more than the proverbial dead cat bounce – a mechanistic post-lockdown rebound after the steepest decline on record. That is very different than the organic, cumulative recovery of an economy truly on the mend. The US remains in a deep hole. 

Just ask American consumers, who, at 68% of GDP, have long accounted for the dominant share of US aggregate demand. After plunging by an unprecedented 18% from January to April, total consumer spending has since recouped about 85% of that loss (in real terms). But the devil is in the details.

The rebound has been concentrated in goods consumption – big-ticket durables like cars, furniture, and appliances, plus soft-good nondurables like food, clothing, fuel, and pharmaceuticals that have more than made up for what was lost during the lockdown-induced plunge. In September, goods consumption in real terms was 7.6% above its pre-pandemic January 2020 high. The bounceback benefited significantly from a surge in online buying by stay-at-home consumers, with e-commerce going from 11.3% of total retail sales in the fourth quarter of 2019 to 16.1% in the second quarter of 2020.

But services consumption, which makes up over 61% of total US consumer spending, is a different matter altogether. Services accounted for fully 72% of the collapse in total consumer spending from January to April. While services have since partly bounced back, as of September, they had recouped just 64% of the lockdown-induced losses earlier this year.

With COVID-19 still raging, vulnerable American consumers remain understandably reluctant to re-engage in the personal interaction required of face-to-face services activities such as restaurant dining, in-person retail shopping, travel, hotel stays, and leisure and recreation activities. These services collectively account for almost 20% of total household services outlays.

The understandable fear of personal interactions in the midst of a pandemic brings us to the second ingredient of the double-dip: aftershocks. With the current exponential rise in COVID-19 cases, lockdowns are back – not as severe as in March and April but still aimed at a partial curtailment of person-to-person activity heading into the all-important holiday season. Precisely at the moment when the economic calendar typically expects an enormous surge of activity, the odds of a major seasonally adjusted disappointment are rising.

This poses serious risks to the still-battered US labour market. Yes, the overall jobless rate has come down sharply from 14.7% in April to 6.9% in October, but it remains essentially double the pre-COVID low (3.5%). With weekly claims for unemployment insurance only just starting to creep up in early November as new curfews and other lockdown-like measures are put into place, and a dysfunctional US Congress failing to agree on another relief package, the risk of renewed weakness in overall employment is growing.

The news on vaccines is truly extraordinary. While the logistics of production and distribution are daunting, to say the least, there is good reason to be hopeful that the end of the COVID-19 pandemic may now be in sight. But the impact on the economy will not be instantaneous, with vaccination unlikely to bring about so-called herd immunity until mid-2021 at the earliest.

So, what happens between now and then? For a still vulnerable US economy now in the grips of predictable aftershocks, the case for a relapse, or a double-dip, before mid-2021 is all the more compelling.

To paraphrase Charles Dickens, this is the best of times and the worst of times. As financial markets celebrate the coming vaccine-led boom, the confluence of epidemiological and political aftershocks has pushed us back into a quagmire of heightened economic vulnerability. In Dickensian terms, to reach a “spring of hope,” we first must endure a “winter of despair.”


Stephen S. Roach is a faculty member at Yale University and the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate, 2020, published here with permission.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

18 Comments

No job, no rent.

Welcome to the present.

in NZ though, Kiwis? ok, have rights of subsidies so can still rent - present & future reality.
Red Cross also being subsidized to administer the foreign visa workers - we're really true kind, here.. but.. but...
No money left in piggy!, easy let's print out some more... and where they're flowing into more than 60%? rental, landlord mortgage.. OZ Banks.
We squeezed the profit from prudent savings, how about from those years of RE investment by Banks? - not a single dime! how dare for you to ask.. - so Kiwis, forge ahead with those rental investment, as the payment will be guarantee (not to be mentioned) by the govt & rbnz.

The economic data was gloomy pre covid - except many believed trumps greatest economy of all bs. Not sure why they think a vaccine gonna change much?

If only New Zealand renters realised the power they had. A national rent strike with our home ownership rates.
The banks would be on their knees in 2 weeks.

It may need to come to that - rolling rent strikes would be the way to go - disruption cash flows on a frequent basis but without getting into arrears such that eviction would be warranted.

How would it get coordinated?

Looked like you simply create an event on Facebook for things like a BLM protest....can be widely distributed to nearly every renter in the country within 24hrs for their awareness.

suggested this on various sites including this several times over past few years. Not sure what's holding up the youngies..

Fully agreed Kate! - and the same from those in front line essential workers: rubbish collectors, cleaners, nurses, doctors, teachers, engineers, police force, lab workers etc. - collective power of strikes is the only NZ last options here, in absence of 'a just governance' - it will be nice to finally see how socio-economic strata in NZ being divided/shown - and let's be fair, the landlords, banks, investors equally can exercise their collective strikes too - but we all shall see some sort of funny pattern, which basically comes down to money - govt+rbnz only options is just to print more of it. If they can't control the power of money, then the money itself will control them, sign of it? they'll ask to have more friends/$ to be printed.

I wouldn't hold my breath on the 'she'll be right' sheeple, especially the young and broke, to stand up and make the effort to change a damn thing.

We're in this sad state of affairs because most of us wouldn't lift a finger despite being taken for a ride by the few in control.

Wouldn't that just result in the banks holding repossessed properties instead of mortgages?

Banks don’t want property...they want cash flow from debt issuance

You ALL sound like a bunch of malcontents! I spoke to your guys spirit animal, Eeyore, he said to tell you'll to; "stop stealing his personality!"

- "No job, no rent."
- "We squeezed the profit from prudent savings"
- "Not sure why they think a vaccine gonna change much?"
- "A national rent strike with our home ownership rates.
The banks would be on their knees in 2 weeks."
- "rolling rent strikes would be the way to go"
- "collective power of strikes is the only NZ last options here, in absence of 'a just governance'"

I'm lucky to be in Christchurch and I have wonderful landlords. HOWEVER, I have lived in some shocking houses in terms of prices, quality and managers. If my landlords decided to sell up, I might be sharing your 'rent strike' sentiments.

Strikes have a way of becoming very pernicious for everyone evolved. When communication breaks down that badly, maybe it's best for both sides to go their separate ways - rather than force a union.

WHAT ARE YOUR DEMANDS? lol

Honestly a rent strike ? Like it's the Landlord's fault you are unhappy ? I have many tenants and they are all very happy and settled, long-term tenants ranging from 2 - 7 years. You would be better putting your frustrations into a new political party than childish Trump like suggestions of rent strikes ! Every first world country whether it is NZ, Assy, US,UK are all experiencing rapid property appreciation at the moment so it is not unique to NZ. What's the answer ? All I know is taxing anything has never made anything cheaper ! The 5 year bright line tax is holding a lot of property off the market. I'm all for a CGT to raise more Tax Revenue but only if it applies to EVERYTHING including the family home, businesses, art everything ! Applying it only to investment properties will increase the number of properties out of the market permanently.

I have many tenants and they are all very happy and settled, long-term tenants ranging from 2 - 7 years.

How would a rent maxima of RV/1000 per week affect your business? I'm trying to find a formula that doesn't discourage existing landlords, but does cool new aspirant landlords from entering the market having purchased properties at way above market rate. Additionally, there would be maximum CPI rent rises in between the three-year RV review periods.

Kate as an owner of rental property I have the right to set my rents to any level I deem appropriate, I choose to be under market value to have stable tenants. Government intervention in any market always causes imbalances.

Government has already intervened in the private sector rental market by way of Accommodation Supplements. From your response, I'm guessing RV/1000 might not suit? But, of course even if regulation setting a weekly price maxima were enacted, you could still choose to set your prices at below that rate. The idea is a "maxima", so it would be legal to go under it. Here's a more full explanation I sent to the PM:

Dear Prime Minister

On the issue of housing, I believe the regulatory initiative/focus should not be on lowering the price of houses per se, but rather on lowering (and stabilizing) the cost of rent, with a particular target for policy effectiveness at the rental market for lower quartile household incomes. The regulatory initiative would be to set rent price controls (not a rent freeze), as a weekly rent maxima formula that is applied universally to
all rented properties, both existing tenanted properties and new-to-market rental properties.

The easiest formula to apply could be to base a rent price maxima on Rateable Value (RV). My cursory look at it, suggests that a universal formula might be, RV/1000 = weekly rent price maxima.

It may need to be tailored differently on a regional basis given RVs are reviewed three-yearly. My consideration has focused on the Wellington market where the RVs were updated in 2019. As RVs are reviewed every three years, CPI could be applied as a rent increase maxima during the intervening years. Such a universal maxima would specifically target regulatory relief to lower quartile income households, who typically rent the lower quartile residential dwellings (this is where I am seeing the greatest percentage increases at the moment). Many upper quartile residential rentals presently charge less than the maxima – as these prices at the higher end are more aligned to the market’s ability to pay.

It is the lower quartile that is most affected by inability-to-pay, and hence unaffordability (i.e., rents equating to more than 30% of household income). According to your Government’s studies;

“At a national level, the share of renter households spending over 30 percent of their income on housing costs remained fairly constant at 31.0 percent in December 2018 (31.3 percent in December 2017).”
https://www.hud.govt.nz/news-and-resources/statistics-and-research/housi...

That data is before y-o-y data on average rental cost increases for 2019/20 has been taken into account;
https://www.interest.co.nz/property/108127/rents-auckland-13-week-compar...

A rent maxima based on a formula associated with RV, has the following benefits:

• A formulaic approach that can be calculated based on already publicly available information.
• Lower quartile properties may become less attractive to property investors, hence taking the ‘heat’ out of the low interest rate housing market, and subsequently giving first-home-buyers (FHBs) less need to compete against the tax advantages afforded to investors.
• Lower rents allow renters the opportunity to save more for a home deposit.
• Should property investors in the lower quartile end of the market exit those businesses, the Government might want to instruct Kāinga Ora to purchase more private homes for State house stocks, in a manner that ensures that it does no displace or compete against FHBs or downsizers. (A number of days-on-the-market might be a metric for such purchases).
• The government need only review Accommodation Supplement maxima (which I believe is set regionally) every 3 years with the corresponding RV reviews.
• No tax changes are required to implement.
• The initiative would be welcomed by NGOs working in the area of inequality/poverty.
• House prices in the lower quartile should remain static, or possibly decrease with the introduction of the rent maxima.
• New builds should not be affected, as the market for new builds has largely been targeted at individual homeowners in the mid-upper income quartile (one of the problems with new development: the private sector is not interested in low-income housing as the profitability is lower).

There might also be a need to concurrently review QVs methodology of residential valuation for the purposes of rating (RV) which is presently based largely on market price paid in the surrounding area. With market prices spiralling out-of-control, every property, whether prior sold or not, has its rating valuation lifted. I have always preferred a rating methodology that recognises, not market prices (dollar value), but instead on the value of public amenities in the neighbourhood area and the proximity of the property to centres of employment and/or public transport services. A number (i.e., points, not dollar) scale would be far preferable to a dollar value scale. The dollar value scale simply fuels property price inflation.