Although economist had originally forecast a V-Shaped recovery for the world, hope is dissipating for such a rapid recovery. The coronavirus is guaranteed to throw the world into an unknown cycle, but economists are becoming less convinced about the potential for a strong snapback in growth.
A V-shaped recession recovery is typically a best-case scenario. Image credit: Forbes
In a V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. V-shapes are the normal shape for recession, as the strength of economic recovery is typically closely related to the severity of the preceding recession.
The base case for forecasters is that a recovery, even a vigorous one, gets under way in the second half of 2020. But as the pandemic spreads through the world (with Europe and the Americas being affected the most severely), and the wide range of knock-on effects comes into clearer view, cautions to that forecast are piling up.
Underlying all of the factors is the simple fact that economic outcomes hinge on something that is beyond the professional competence of most, if not all economists to forecast: the trajectory of the virus itself. There is no certainty the virus will be gone by the end of the second quarter and the longer it lasts, the more likely all the direct and indirect effects will be amplified.
Beyond that, there is an array of questions for economists to grapple with — and those doubts increasingly undermine projections for what’s known as a “V-shaped recovery,” in which lost output is quickly restored.
Rather than sounding a decisive ‘all clear’, authorities are likely to advocate a gradual return to normal working life, so the behaviour known as ‘social distancing’ may stick around for longer than expected.
Along with the financial instability sustained during the current downturn, it is likely to dampen spending on travel, spending at shops, restaurants, and so on – assuming these businesses have the means to stay afloat in the first place.
Central banks across the world have cut interest rates this year but consumer caution is already evident in China, even though authorities say it’s safe to go back into the marketplace, and this behaviour could happen elsewhere.
A major impact on recovery will depend on how fast businesses bring back jobs. The International Labor Organisation warns 25 million positions may be shed, and Goldman Sachs Group Inc. has indicated it expected unemployment to increase significantly and this threat could be heightened by the scale of borrowing in recent years. The Institute of International Finance estimates household debt — as a share of output — is at record levels in several economies around the globe.
On the proactive side and keen to avoid an extended recession, policy makers globally have been taking emergency measures on a scale that likely exceeds even the response to the 2008 financial crisis. They are extending credit lifelines to business, paying cash to households, and helping companies cover their wage bills so they don’t have to fire workers and offering payment holidays.
The strongest argument for a rapid recovery is what economists call “pent-up demand” — a label that applies quite literally in the current crisis. Economies shuddered to a halt when people were forced to hunker down at home on national lockdowns, so there should be a corresponding upswing when they are ‘allowed out again’ – especially with governments everywhere injecting cash to speed the process.
Assuming the outbreak peaks by April/May, this will likely set the stage for a recovery in the second half of 2020, and by the third quarter of 2021, we may be back to levels and outputs prior to the 2020 pandemic.
The various shape recessions economists refer to
- V-Shaped Recessions
V-shaped recessions are recessions that begin with a steep fall but then quickly find a bottom, turn back around and move immediately higher. A V-shaped recession is typically a best-case scenario. - U-Shaped Recessions
U-shaped recessions are recessions that begin with a slightly slower decline but then remain at the bottom of the cycle for an extended period of time before turning around and moving higher again. - W-Shaped Recessions
W-shaped recessions are recessions that begin like V-shaped recessions but then end up turning back down again after showing false signs of recovery. W-shaped recessions are also called “double-dip recessions” because the economy drops twice before a full recovery is achieved. A W-shaped recession is painful because many investors who jump back into the markets after they believe the economy has found a bottom end up getting burned twice—once on the way down and then once again after the false recovery. - L-Shaped Recessions
L-shaped recessions are recessions that fall quickly and fail to recover. An L-shaped recession is a worst-case scenario because they offer no hope of recovery.
