The 6 Potential Shapes of Corona Recovery
2020 has undoubtedly been a tough year for the whole world - with the coronavirus pandemic touching every corner of the planet and creating crises in both public health and the economy. Indeed, it's believed that about 93% of the world's economies could dip into a recession before the year is out - an unprecedented scale of financial fallout.
Yet, while positive news on the vaccine front suggests we could be able to turn a corner and manage the health aspect, economists have already turned their sights on the recovery in 2021 and beyond. Broadly speaking, the theories can be explained by six different shapes. In this post, well examine what they mean, who believes them to be true and why.
The L Shape
This is the most pessimistic view of the six - and asserts that the economy will embark a long and flat recovery over a number of years after taking an initial dip.
A World Economic Forum study of more than 600 CEOs found that business leaders in Japan and the Gulf region are most likely to believe this will occur. Perhaps these fears persist in Japan given the country's long L shaped comeback during the 'lost decade' of the 1990s.
Yet that pessimism might be misplaced. Daniel Lacalle, chief economist at Tressis, told online trading experts IG that he does believe in an L shaped recovery, but not for Japan and its Asian neighbours.
He said: Asia is one of the regions that comes with lesser impact because they were better prepared, because they take harder, stronger measures to prevent the pandemic and also the recovery is going to be much stronger than that of the Eurozone certainly.
In general, however, Lacalle believes that the process of taking on debt to prop up economies during the crisis will cause a long, slow, L shaped recovery.
The V Shape
With a 'V', the global economy would quickly bounce back to pre-crisis levels (although no higher). This was a theory also explored by IG, in an interview with Steve Hanke, professor of applied economics at Johns Hopkins University.
He argued that while there is room for rapid growth after lockdowns are eased - the damage to supply chains is likely to be devastating for gross output and that the ensuing crisis will make the 2008 crash look like 'peanuts'.
Of the supply chain issue, he explained: "You are going to have trouble putting humpty dumpty back together again, that's basically the problem. There will be all kinds of speed bumps in the road. Forget about a second wave, there will be a second, third, fourth, fifth, six etc."
The U Shape
Speaking of 2008, the world's last big global shock resulted in a U shaped bounce back. This sort of recovery is a more slow-motion version of the V shape outlined above, with the decline and recovery slightly more gradual.
Some believe that the initial shock was too sharp for this sort of recovery in 2020 - yet an EY study showed 54% of companies in the US believe it to be the most likely outcome.
The theory here is that measures will be relaxed gradually, with social distancing, remote working, and new consumer behaviour patterns slowly returning to normal as the public health crisis eases.
The Tick Shape
Other economists have tried to explain the recovery as somewhere between the V and the U - leaving us with the 'Tick' shaped recovery that's sometimes known as a 'swoosh' or 'Nike logo' recovery.
In this scenario, the recovery is slower than in a V, but faster than a U. It also addresses the fact that the initial drop was too steep for a U shape.
The theory was explored in a report by Berenberg Bank. It stated: The unprecedented drop in output caused by the lockdowns will be followed by a major rebound if and when supply can be switched on again. However, the pace of the initial rebound will not resemble a V-shape. Lockdowns will be eased gradually and consumer demand, as well as business investment, will lag behind the reopening of supply.
The W Shape
W might well stand for worry here as well as representing the financial trajectory of the economy since it demonstrates a partial recovery being choked off by a second wave of the virus before a full return to pre-crisis levels can be met.
Rising infection rates in the US, Brazil and India sparked fears of this in the summer - with economists at IHS Markit suggesting it would be the most likely outcome. With further spikes across Europe, the prospect of a widespread W shape are only exacerbated.
The Z Shape
The Z shape offers a more optimistic take on the 'V' - with the easing of lockdowns and restrictive measures causing a surge in economic activity that briefly goes beyond even pre-crisis levels.
The World Economic Forum dismissed this during the current pandemic, feeling it's slightly too optimistic. Given the rising second wave in many countries, this might well be true - although it's worth monitoring the growth achieved by the likes of Poland, Denmark and even China.
Despite a relatively low number of cases in Singapore, the coronavirus is clearly still an ongoing issue and will continue to leave the world economy in trouble.
It's perhaps too early to be certain of the exact shape of the eventual recovery - and it may be more instructive to consider the specific situations of different economies, which may take on wildly different shapes depending on the nature of their economic mix (the sectors they specialize in etc) as well as the ongoing scale of their public health crisis and the financial measures needed to weather the storm. As we near the end of 2020, the next raft of data will ensure the recovery - or lack thereof - really starts to take shape.