With some countries nearing the peak of their Coronavirus battle, talk is turning to how the global economic recovery will play out. With many analysts debating the shape of the recovery Julian Broom, our Chief Investment Officer, explores how it might look:

In attempting to forecast how the world’s economic recovery may develop, economists are certainly divided. In fact all sorts of shapes have been proposed – from a V-shape and U-shape to even a Nike ‘’swoosh’. Early predictions seemed to be focused on a V-shaped recovery, where a significant slump was quickly followed by a quick, positive rebound. This now seems unlikely given that ‘exiting’ the virus will be a slower process than simply lifting sanctions and allowing us all to go back to normal overnight. At this stage it looks realistic that the global recession will be at least as deep as in 2009, or perhaps even the period following World War II. Yet recovery will happen; it always has and this will be no different in the months and years to come.

Ultimately there will need to be a semblance of balance in containing the virus, delivering economic support as needed, enabling consumer confidence and managing the behaviour of the private sector. It seems sensible to recall the old adage ‘forecasting is hard, especially the future” which is particularly relevant now.

Despite all this it’s worthwhile to consider how the recovery could play out according to some of the scenarios which analysts have proposed:

V-shape

A V-shaped recovery could be achieved if the Coronavirus pandemic clears through Europe in April and May, with social distancing relaxed shortly after. Business and workers return smoothly, and unemployment reduces. The resulting demand, supported by the fiscal and monetary stimulus deployed by government, is significant. The economy recovers with output levels back to late 2019 figures by early 2021. The indicators for a V-shaped recovery are driven mainly by the purchasing managers’ index data for China during March, as a result of factories surging back into production, but it is yet to be seen if these numbers can sustain themselves.

U-shape

In this scenario Coronavirus would hold its grip through June, with social distancing taking time to be relaxed. Pent up demand would be seen, but with hesitation. Consumers would be slow to race back to shops and restaurants, as business take time to gear back up, pockets of unemployment continue and debt is repaid. Trade is slow to start, and recovery follows cautiously, kicking in from late 2020. Many analysts – when looking at China, South Korea and the rest of the region – are now favouring this shape of recovery.

L-shape

An L-shaped recovery is a possibility if Coronavirus extends beyond June, with social distancing continuing into the second half of the year. As a result, spending on services and overseas travel will continue to be vastly reduced and debts will increase. Business and personal financial difficulties will grow in scale and equity markets will continue to struggle. Consequently, additional stimulus from governments will be needed, although it may take time to organise and deploy.

W-shape

This scenario could be seen if restrictions to control Coronavirus are lifted prematurely, and the infection returns, resulting in another lockdown. As a result, an initial recovery would be quickly followed by a dip back into recession. At this stage it’s too early to say whether this is likely, and time will tell as countries attempt to exit the pandemic.

Tick-shape

This type of recovery is best illustrated by a Nike ‘swoosh’ and represents a situation where business and spending resumes gradually with many reluctant to spend and travel. The flatter upturn means economies maintain pre-2020 levels well into 2021. Berenburg Bank has commented that the upturn would reach ‘beyond the pre-Coronavirus level of GDP’ surpassing ‘late-2019 levels roughly two years after the trough’.

It’s clear that these differing shapes offer some suggestions as to what path the recovery might take. Yet economists are clear that there are no hard and fast rules, and the true outcome certainly won’t be as rigid. Indeed, it’s clear that since 2008 the trends which we have seen don’t really fit neatly into these shapes of sharp downturns and bounces. Consequently, we may need to consider more fluid shapes to illustrate the shape of recovery, such as the swoosh or even letters from the Arabic alphabet. These may much better reflect our future world, with its low growth, lower rates, an older demographic and higher levels of debt.

In a period of uncertainty, it can be difficult to know who to turn to. We have been supporting clients around the world for over 120 years and are here to help. If  you have specific queries please contact our financial planning team.

Julian Broom
Chief Investment Officer

julian.broom@thefrygroup.co.uk

This entry was posted on Wednesday, 8th April 2020 at 12:05 pm and is filed under Financial Planning, Investments, News. You can follow any responses to this entry through the RSS 2.0 feed.

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