What shape will the coronavirus economic recovery take? Experts comment

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The coronavirus pandemic has dealt a devastating blow to the global economy not seen since the Great Depression nearly a century ago, prompting many to question what shape any kind of economic recovery would take.

The economic fallout of the pandemic could cost the global economy $4.1 trillion, or almost 5 percent of the global GDP, depending on the disease’s spread throughout the world, the Asian Development Bank recently said.

But as some countries begin to ease lockdown measures and look to economic recovery, experts have begun to debate what shape this recovery will take. With these forecasts come a medley letters: U, V, W, L to indicate whether we can expect a slow-burn recovery, a bounce-back, a relapse or a long-term dent to growth.

It is too early to definitively know what shape the global economic recovery will take, according to Robert Quartly-Janeiro, visiting fellow at the Hellenic Observatory, European Institute.

“However, it is not unreasonable to envisage a ‘U’ or ‘W’-shaped recovery because real economies have lost so much economic demand,” he said.

A U-shape graph would suggest that recovery would take a couple of quarters. This can be compared to the best-case scenario – a V-shaped recovery, which would show a sudden dip then return to growth.

A W-shape would, however, show a recovery where economic growth returns as measures impeding normal economic function, such as lockdowns, are lifted but then long-term problems begin to drag. Recent sky-high unemployment figures may dampen consumer’s ability to purchase products, pointing to this as one possible scenario.

“Even in countries like South Korea, where life is returning to normal, or in emerging markets where COVID-19 has not yet fully hit, consumers are wary of spending and businesses have seen deep declines in demand, dragging them into the economic crisis … The recovery will be gradual and different in each country,” Quartly-Janeiro said.

Robert Willock, director, MENA, The Economist Corporate Network, predicts a U-shaped recovery as the current recession looks “steeper and deeper” than the financial crisis of 2008/09. However, he does not rule out the possibility of it turning to a W or, in the worst-case scenario, an L-shape where growth plummets but it takes a very long time to recover.

“Pandemic-driven recessions are usually short and sharp, as much of the lost demand is pent-up and released when the all-clear is given. And that would normally result in a narrow V-shaped recovery. But this is likely to be a different kind of pandemic recession, with a different kind of recovery,” Willock said.

Central banks and governments have opened the taps on unprecedented stimulus measures to try to halt the economic fallout of the coronavirus, but this may still not be enough.

“Even with assertive fiscal stimuli, we might yet see a U-shaped recession as variations in the timing of the outbreak around the world mean a synchronized return to normal global supply and demand conditions is unlikely,” Willock added.

It might worsen to W or L

In a more negative scenario, Willock said the world could even see a W-shaped recession.

“Until there is an efficacious vaccine made widely available there is clearly a risk of a second wave of infections that could stall and reverse a recovery, even after the first wave has abated,” he said.

Beyond a W-shape lies a dreaded L-shaped recession, a possibility that would prove bleak for the world economy.

“An L-shaped recession occurs when an economy does not return to trend line growth for many years. This could happen if the COVID-19 virus becomes a regular, seasonal infection. However, increasing levels of immunity in the affected populations should mean each new wave is less deadly than the last,” Willock added.

The end of globalization?

Zak Hydari, CEO of Dubai-headquartered investment bank Rasmala, says the shape of the recovery is dependent on the emergency measures to fight against the pandemic.

“Our central scenario is that the global economy will contract sharply in Q2 and Q3, remain weak in Q4 and Q1 2021 with the rest of next year being flat. The growth trajectory will ultimately depend on the amount of government support provided to national economies,” he said.

Hydari predicted that global trade would recover but it would be forever changed. He said countries would reassess their own internal capacities and aim for greater self-sufficiency, adding, “This will dramatically change global supply chains to regional ones.”

International travel patterns may return to normal for years as governments continue to use travel bans and other “blunt tools” to protect their populations and health systems, he explained.

“The social contract between governments and citizens will be rewritten as unemployment will spike globally in the next three to six months and will take several years to recover to pre-COVID-19 levels,” Hydari said.

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