While vaccine hopes are driving markets higher to book historically strong gains, the US economy is still in a vulnerable position, according to former Morgan Stanley chief economist Stephen Roach.
Roach believes the soaring number of coronavirus infections will cause further lockdowns. While new restrictions are likely to be less severe than they were in March and April, the consequences will definitely affect the whole US economy.
“That’ll lead to a temporary relapse in the economy, probably in the first quarter,” Roach told CNBC. He added that those relapses had occurred in eight of the past 11 business cycles, and warned, “I don’t think this one is an exception to that rule.”
The economist explained that those relapses reflect a lingering vulnerability to recession and the likelihood of aftershocks. He noted that the recent record rebound after the steepest-ever decline was just technical, with the key services sector still failing to get back on track.
The world’s largest economy may contract by one percent in the first three months of next year, according to Roach. Similar figures were earlier voiced by analysts at JPMorgan.
Roach also reiterated his gloomy prediction for the fate of the US dollar, which he expects to drop over 30 percent by the end of next year. Since the pandemic wreaked havoc in the global markets in March, the Dollar Currency Index, which measures the value of the greenback against a basket of currencies, tumbled by over 10 percent.
The collapse of the dollar may be driven by massive account deficit, the economist earlier said. When he first voiced the prediction of sharp dollar depreciation, some saw the idea as crazy, but Roach says it’s now “playing out even more dramatically than even I thought when I wrote about it.”
“This is just the early stages,” he concluded. “The pressure on the dollar is likely to be even more intense.”
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