While some economists expect a V-shaped recovery, others say it will not be as sharp as the decline, and it could be years before output rises to pre-coronavirus levels.
KBW Director of Research Fred Cannon expects “an L-shaped recovery, with GDP levels only slowly rising and economic activity at the end of 2021 being 5% below the levels going into the downturn. We could see a greater 2Q decline than our negative 18% estimate with a greater rebound in the third and fourth quarter.”
“This pandemic crisis is fundamentally different” than the financial crisis that led to the Great Recession, according to Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy, “it directly affects virtually all households and businesses and is a negative shock to both aggregate demand and supply. Advanced nations’ economies will decline by a similar magnitude or more (as in 2008-2009) but over a shorter period, while emerging market and developing nations’ economies (EM) will contract even more.”
The crisis will continue through April in developed nations, and while “Measures of economic activity will register percentage gains, … they will not match the current dramatic percentage declines now unfolding, and it will likely take several years to lift economic output back up to pre-crisis levels,” he said.
And while the U.S. should fare better than other nations, since its economy was doing better prior to the crisis, “a true V-shaped recovery is not in the cards,” Levy added.
Although China’s beginning to get back to work, “significant obstacles remain … including a collapse in product demand and bottlenecks in supply and distribution chains.”
If it takes “an extended period” to return to normal, “GDP would drift sideways or modestly lower from its depressed Q2 level, rather than falling sharply further,” according to Levy, a member of the Shadow Open Market Committee.
The recovery will depend on “confidence that the acute stage of the pandemic has passed (and will not reoccur) and that normal activities are safe,” he said, which would require confidence in the health system.
Higher unemployment and less disposable income and household wealth will restrain the economy. “Historically, capital spending and fixed investment fall hard during recession and bounce back sharply during recovery, but that is not expected this time,” Levy noted. “Capital spending was notably soft in most advanced nations prior to the crisis,” so businesses will likely be cautious, waiting for more assurance before expending or expanding.
Elsewhere, tourism will recover slowly, so the hospitality and leisure sector will suffer. Discretionary purchases, especially in the luxury category, could “lag,” Levy said. “The shift to online buying will continue to drive retail sales. Businesses will take a large hit to profits and retained earnings.”
Pandemics, unlike war, “do not destroy capital, and recovery periods are not boosted by capital."
Monetary policy, currently quite easy, “is very unlikely to offset health-related uncertainties as long as the acute stage of the pandemic lasts,” Levy said. “Moreover, a sustained recovery requires that the monetary easing stimulate bank lending and put the high-powered money to work in the real economy. Impairment of bank credit channels stemming from damaged balance sheets and capital losses may require further unconventional central bank policies, including temporary regulatory forbearance on bank capital adequacy and leverage ratios.”
The stimulus provided to date, in his opinion, “are not fiscal stimulus that will generate stronger growth.” But he sees the U.S. offering money “to states to fill budget deficit gaps and finance infrastructure spending. This would stimulate jobs and output similar to traditional countercyclical fiscal stimulus.”
Central banks have stepped up, and “the lines between monetary and fiscal policies have been blurred” as they get more involved in the financial markets and their balance sheets grow. “Whether these changes are temporary or more permanent is yet to be seen,” Levy said.
Modest deflation is expected. “Even when households and businesses begin to resume normal activities, price-setting behavior will put downward pressures on prices,” he said. “Businesses will seek to jump start their revenues and cash flows through price discounts, and consumers will seek bargains on the goods and services they buy.”
In data released Monday, the March 2020 Survey of Consumer Expectations indicated “considerable deterioration in households’ expectations regarding their labor market and financial situation across all age, education, and income groups,” the Federal Reserve Bank of New York said.
Respondents’ expectations of losing their jobs was 18.5%, the highest read since the survey began in June 2013. Income growth and spending expectations “fell sharply and the perceived availability of credit worsened,” with respondents seeing a greater chance for missing a debt payment.
The Employment Trends Index plunged to 60.39 in March from 109.27 in February, the Conference Board said.
“The Employment Trends Index plummeted in March, almost entirely due to the historically large increase in initial claims for unemployment,” said Gad Levanon, head of the Conference Board Labor Markets Institute. “This period of declining employment is historically severe but could also be historically short. The most likely scenario is that within a couple of months, most of the orders to shut down non-essential businesses and stay at home will be lifted. While many employers will continue to shed workers after that time, these job losses will be more than offset by the millions who will return to work in the reopened businesses. Nevertheless, the total number of workers is likely to remain well below pre-COVID-19 levels for the remainder of the year, and the unemployment rate will remain in double digits after peaking at 15% in May.”
