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V, L or ‘Nike Swoosh’? Economists debate shape of global recovery
5 min read.Updated: 02 Apr 2020, 04:28 PM ISTSimon Kennedy and Michelle Jamrisko, Bloomberg
The most pessimistic are looking at global growth tracing an L or a W - or a more mangled path that bears little resemblance to Roman letters.
Economists are serving up a menu of alphabet soup in trying to forecast the world economy’s recovery from what is set to be the deepest recession since at least 2009 and perhaps since World War II. A V-shape in which the rebound is as swift as the slump was the favored trajectory early on, but now more are starting to worry about a U-shape. The most pessimistic are looking at global growth tracing an L or a W -- or a more mangled path that bears little resemblance to Roman letters.
“There is a complex relationship between the path of the virus, the effectiveness of virus containment and economic support policies, and the behavior of the private sector," JPMorgan Chase & Co. economists led by Bruce Kasman said in a report to clients this week. “Consequently, there is enormous uncertainty about the path ahead, bringing to mind the adage ‘forecasting is hard, especially the future.’"
Here’s how the recovery would look under each scenario:
The virus clears up in Europe and the Americas in April or May, allowing social distancing rules to be relaxed. There is an unleashing of pent-up demand aided by the massive fiscal and monetary stimulus that policy makers have already deployed. Factories and services are able to reopen for business smoothly. Government efforts to stop companies from firing workers prove successful and unemployment recedes. Economies return to their pre-crisis levels of output around the start of 2021.
China’s March purchasing managers index data provided the biggest hint yet that such an upbeat scenario remains possible as the world’s second-biggest economy restarts its production engines. Both the official and Caixin factory sentiment gauges lurched into expansion territory even as most all of the rest of Asia fell into deeper contraction.
Analysts including Macquarie Group Ltd.’s Larry Hu, however, note that a lot will have to go right for those kinds of upbeat numbers to sustain themselves in China -- especially with prospects for a second-quarter global recession, further spread of the virus, worsening deflation, and domestic property market woes.
The virus lingers into June and social distancing rules take time to be loosened. While there is a release of pent-up demand driven in part by the stimulus of governments and central banks, consumers don’t race back to shops or restaurants. That’s because factories and other workplaces take time to return to full capacity and not every job lost in the crisis is won back. Some need to repay debts they built up during the crisis. Trade also remains sluggish as each trading partner is slow to pick up. The recovery eventually materializes, but not until late 2020 or beyond.
Looking at China’s trajectory and its impact on South Korea and the rest of the region, Chong Hoon Park, head of Korea economic research at Standard Chartered Bank Korea Ltd., favors a ‘U’ over a ‘V.’
“I think the Chinese slowdown is going to drag on," he said on Bloomberg Television Wednesday. “I’m not that optimistic we’re going to see a V-shaped recovery, with the Chinese recovery unclear."
The virus runs into the second half of the year, forcing social distancing rules to remain beyond June.
Even if it fades before the summer, there is still a chance the recession will be lengthier than anticipated or the recovery will be stretched out. In this scenario, people continue to cut back on services spending -- opting to keep with their home theaters -- and resist taking holidays. Debts built up before or during the crisis become hard to pay down, setting off a spiral of default and business bankruptcies that create fears of a credit crunch. Equity markets fail to bounce.
Governments have to deliver more stimulus after their previous efforts failed to spark demand, but that takes time to arrange.
At Nomura Holdings, economists led by Rob Subbaraman say an L-shape would be their worst-case scenario in the U.S. Erik Britton of Fathom Consulting says a prolonged slump will be hard to avoid if Covid-19 returned, meaning the outlook is either a ‘V’ or an ‘L’ with not much in between.
The virus returns. Academics at Imperial College in London have warned that if efforts to control the pandemic are loosened prematurely, the virus could stage a comeback. That would mean the re-imposing of restrictions, reigniting uncertainty and forcing the closing of workplaces and service providers again. The result is a recovery followed by a lurch back into recession.
“The key risk to our baseline V forecast is a potential return of the virus in the third quarter," said Keith Wade, chief economist at Schroder Investement Management Ltd. “In economic terms this would lead to a double-dip recession with businesses closing again as restrictions on movement are re-imposed."
Also known as the “Nike swoosh," this scenario allows for businesses and spending to slowly resume as limits are eased more carefully than they were introduced. The level of economic output stays beneath the level of its pre-crisis trend well into 2021 and there’s a lack of animal spirits as people remain cautious of over-spending or taking long-distance trips, especially if they have to deal with debts.
“The sharp downturn will be followed by a slightly flatter upturn that ultimately goes beyond the pre-coronavirus level of GDP," Holger Schmieding and Kallum Pickering, economists at Berenberg Bank, said in a report. “By and large, we expect GDP to surpass its late-2019 level roughly two years after the trough."
Economists aren’t ruling out that the recovery could look very different from any shape they’re used to scribbling on charts.
Alongside a global base case for a ‘U’ shape for the next few quarters, PIMCO global economic advisor Joachim Fels warned in a note last month that “this ‘U’ may feel initially like an ‘I’ as economic growth drop sharply,
Others are finding more fitting shapes beyond Western script.
“The letters V and W, with their sharp bounces, and mean-reversion assumptions, seem to belong to a 1945-2007 world, a prior era compared to post-2008 structural trends," Robeco Institutional Asset Management analysts including James Stuttard, head of global macro, wrote in a report this week. “U seems to ignore 10 years of lower growth and rates. The letter L seems more suited for Japan."
Instead, Stuttard and colleagues wrote, the Arabic letter Baa’ is a suitable illustration of the projected recovery.
“In an age of lower secular growth trends, low rates, older demographics and higher debt, the elongated horizontal sweeps of the Arabic alphabet seem a better fit than Western equivalents," they said.
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.