OK so we’re in a bit of an economic downturn. I know. It’s tough. But what can we expect? I mean, we are in a global pandemic…
So instead of getting down in the dumps, let’s put our thinking hats on and focus on what the next steps could be for the economy.
If you read our recent article about recession shapes, you’ll know the v-shape is the one we’re hopeful for since that gives us the quickest route to recovery.
But is that likely to happen?
To achieve that, first of all there needs to be a slowdown in the spread of the virus.
An important metric is the ‘R’ rate which needs to be below 1. This is the reproduction rate of the virus; so it shows us how many people an infected person will pass the virus onto, on average.
Since most countries are now coming out of lockdown and easing restrictions, we can clearly see that this has been reducing, but unfortunately, some countries aren’t that far below 1.
In fact, Germany’s R rate spiked above, suggesting they may be coming out of lockdown too soon. With large social gatherings taking place around the world, it could be the case elsewhere too.
Next, we would be looking at data suggesting the economy is picking up speed again.
In the US, the latest employment figures in June were well above expectations and a very good sign that the economy is getting back on track; businesses are reopening and rehiring.
However, there was a misclassification error in the data release and the actual numbers were not as good as they seemed on the surface.
Many analysts expect to see a more gradual reduction in unemployment instead and this would be more of a characteristic of a U-shaped recovery. This is also in line with what GDP is likely to show us about the growth in the economy.
The Federal Reserve shot down the prospect of a V-Shaped recovery in their latest economic forecast after suggesting that GDP would contract by 6.5% in 2020 and take two years to reverse.
They’re looking at more of a U-shape or a tick, like the Nike swoosh.
In fact, according to the Bank of America, global fund managers aren’t so optimistic about a v-shaped recovery either, with just one in ten expecting one.
You see, the problem might not be as simple as demand picking up in the economy again as lockdown ends.
A paper also showed that the recovery would be slow and incomplete due to negative supply shocks. The demand component of GDP is likely to recover quite quickly over several quarters, but negative supply shocks, which are associated with lower productivity growth, higher unemployment and other reductions in production capacity, may remain for years.
This means that unless supply shocks can be reversed very quickly, it’s going to take some time to recover. In fact, certain areas of the economy, such as tourism and entertainment may even need to reinvent their business models entirely to get back on track in a socially-distanced world. This would massively impact countries where tourism contributes to a big chunk of GDP.
So all of this points to a slower recovery than a v-shape, but a still fairly steady return to normality.
But then there’s the big question on everyone’s lips... What if the R-rate increases?
In the June OECD economic outlook, they outlined two core scenarios that they say are equally likely; what they’re referring to as the ‘single hit’ or ‘double hit’. If you’re clued up on your recession shapes, you’ll recognise these as the v-shaped and w-shaped recoveries. And if you didn’t know that, time to watch our video on recession shapes.
The ‘double hit’ refers to what would happen if there’s a second wave of the virus.
Since there is no vaccine, a second wave of the virus is still a very real threat right now, and already in many places, including the US, they are beginning to see an uptick in COVID cases. This is a similar scenario that has played out in previous pandemics, as complacency and fatigue with countering a virus begins to set in.
If GDP does increase, but the economy is slammed back into lockdown (or at least the re-opening is slowed due to a rise in cases) that could cause a double-dip as GDP growth once again declines into negative territory.
But let’s look on the bright side and remain hopeful.
One of the biggest factors has been and will be economic stimulus. Just like we saw in the financial crisis over a decade ago, a slow and inadequate response can drag the recession out longer than needed.
This time, major central banks and governments were quick to act and provided record amounts of stimulus. However, the effect from this will begin to fade, which may mean more monetary and fiscal support will be needed to keep the recovery chugging along.
It seems likely that that’s what’s going to happen. The US government recently announced they are considering a further $1 trillion in infrastructure spending and the Fed are revealing plans to begin buying individual corporate bonds. The US stimulus is also trickling into emerging markets as a by-product as well.
So in other words, as long as the virus bloody well f***s off and the money printer still keep printing, things will be just fine.