We are in a recession. There is no doubt about it. Unlike some other downturns, we are often still debating if the economic data supports calling an official recession. The official definition is 2 consecutive quarters of slowing GDP. But with this pandemic, we know that GDP and all productivity has fallen off a cliff.
But we won’t be in this position forever. Like with other pandemics like the Hong Kong Flu or with SARS or even the 1918 pandemic, we will come out of this. This is not going to be what wipes out humanity. But what will that look like?
Economists & financial people talk about the shape of recoveries using letters. Perhaps you’ve come across them. Is it going to be a “V-shaped” recovery? Or it is going to be “U-shaped”? Are there other shapes?
Actually yes. There is “W”, “L” and apparently now, the Nike swoosh.
Different Recovery Scenarios
What’s up with these shapes?
They are supposed to represent the line graph of a plot of anything measurable. It might be a chart of GDP, or a chart of the stock market, or a chart of employment.
So far, we have seen the left side of the recovery letter shapes – the sharp decline.
We are all hoping for the V shape recovery in that we rebound sharply. We have just the briefest of downturn, quickly turn things around and we climb out of this economic funk. That employment numbers start to climb. The stock market prices climb as well.
The U shape is similar. Except that we bump along the bottom for a while and when the economy picks up again, it’s a strong recovery. We come out of the gates like a rocket with strong demand for flights, goods and services.
Those are actually the 2 best outcomes.
Less Positive Outcomes
How we might experience the W shape is that we start to see a rebound, but because of a resurgence of COVID cases, are forced to shut down again. This would cause economic metrics to crater again. Even with this shape, we can have some variations too. Think of the cursive we learned in school (showing my age here). We can have a printed W where we have shape points. Or we can have a cursive W where we have rounded depths that look more like 2 U’s touching.
The last shape is L. This is the one that all economists and investors dread. This shows that we experience a rapid decline, but we never quite recover. We sort of just flat line for years. Employment remains depressed. Business profits never quite materialize. Household wealth has cratered and because of the lack of jobs, they don’t recover either. There are so many knock-on effects because our western societies are predominately based on consumer activity.
How Different Countries Might Recover
Some Will Recover Quickly
Any of these shapes are still plausible because we are only 6 weeks into the lockdown. It is reasonable to deduce that there will be different curves and different shapes depending on how the course of the pandemic flows through society. For example, China might be on the upward trajectory of the V shape recovery. They are restarting their economy which is heavily manufacturing. If they have things to sell, they can make money.
Others Might Have False Starts
Economies like Italy and Germany might experience a U shape recovery. Their lockdowns are slowly being eased, but it is still expected that each phase of re-opening will be measured. Hence their economies might bounce along the bottom for a bit before recovering fully.
I feel that the US economy is most at risk of a W shaped recovery. Currently many in the Federal and State government want to quickly reopen the economy. Despite the fact that COVID19 is not yet under control. In some communities, it is still spreading like wildfire. Although there has been a slowing of transmission since the lockdown began, new infections may see a resurgence as the workforce start commuting into their place of business. If cases surge and start to overwhelm the hospitals again, then the government might be forced to impose another lockdown. Grinding the economy to a halt again and sliding down the middle curve of the W.
Some Nations will Suffer Disproportionately
Poorer nations, like those in underdeveloped parts of the world, might experience an L shape economy. These would be countries that have weak medical infrastructure, high population density and a high number of the population with underlying health conditions.
In many of the developing world, men & women work in adverse conditions; in mines, in factories with poor air quality that assaults the lungs and cause long term respiratory damage. Or because of the lack of access to health care and poor nutrition, have a higher prevalence of diabetes. In communities like these, COVID 19 can ravage the adult working population. Like the heavy toll that HIV took in early 2000 that killed men and women between the ages of 15 to 49. These are the prime productive years of the average workforce.
If a society is left with mainly children and grandparents, we can extrapolate that the economic recovery wouldn’t really take hold until these children grow up and enter the workforce.
How Different Parts of the Economy Might Recover
The same analysis can also be applied to sectors of the economy too. There will be some industries that are quick to rebound. Sectors like Tech (hello Amazon) and consumer staples (Clorox anyone?). There will be sectors that emulate the L-shape; airlines and tourism come to mind. These industries will be affected by border closures, different rates of infection and containment in various regions. Also, it’ll depend on the confidence of the travelling public. Are they secure in their finances to take time off work and spend it on travel? Do they trust the airlines to have proper procedures? It may be years before these industries recover to pre-pandemic conditions.
Housing, auto manufacturing and consumer products may experience the gamut of the U or W shapes depending on the leadership of the company and the specific niche they are in.
How Does the Current Crisis Compare to the Last Recession?
Last, I want to talk about this “Nike Swoosh” shape. It’s a newer term and postulates that the recovery can be a steady trajectory up but played out over many years. I would argue that we have all experienced this. This has been the shape of the economic recovery since the 2008 great recession. We started hearing about the divide between Wall Street and Main Street more and more after the Great Recession. Wall Street recovered relatively quickly, but the economy malingered for many years until the mid-2010’s when we started having steadily increasing job numbers and most recently in 2018 and 2019 when large retailers complained about not being able to find workers at minimum wage.
We’ve experienced this and it was painful. What is different this time around is the unprecedented swift and massive action that most governments took to prop up the economy through fiscal stimulus. We had relied on monetary policy solely in 2008-2009 and it led to many unintended and unpredicted consequences. Having seemingly learned from those mistakes, many countries are going for the shock and awe approach to reassure its citizens that the government is their backstop and has their back. This may prove to be very beneficial in the long run, despite the large deficits.
Conclusion
It is clear that we are facing a choice of short-term pain for long term gain. Some of our leaders have passed the marshmallow test, and resist the immediate gratification to re-open everything back up. Some leaders have failed to resist temptation. But in public health, a healthy workforce equates to a thriving economy. If we have too many bursts of starts & shutdowns, starts and shutdowns, this will be traumatic to the health of the workforce, but also the psyche of the consumer.
How can I be confident to buy things when I’m not sure if my workplace will close down next week again? I can’t.
We are living through history. No one has seen anything like this in a hundred years. So the future is not yet written. All of the possibilities are still on the table and that is reassuring. We can still be stewards of our future. With smart policy action in terms of economic stimulus and data-driven lockdown easing, we can still experience a swift recovery and train our eyes on creating a better future.
For now, stay safe, stay healthy and stay indoors.
Let’s keep in touch while social distancing.