translated from Spanish: Coronavirus: the 3 possible scenarios for the recovery of the economy after the covid-19 pandemic

The covid-19 pandemic is brewing a recession that the International Monetary Fund (IMF) has already named it” “The Great Confinement,” and now that there seems to be consensus that it will be the biggest economic crisis since the Great Depression of 1929, the question economists ask the question is: what form will it take?
The answer will be taken from the alphabet, which experts have relied on for decades to describe at what pace an economy is recovering.
“It’s a good simplification and a very graphic way of saying what style we think a recession is,” José Tessada, director of the School of Management at the Catholic University of Chile, tells BBC Mundo.
Because there are no rules that define them, each analyst chooses the letter that most closely resembles their predictions. However, the most popular ones, as Tessada says, are the V, W and U.
“The preference for letters comes from what the PBI growth rate graph looks like over time,” he explains.
There are different concepts of what a recession is. In the United States, the National Bureau of Economic Research (NBER) talks about recession when there is a “significant” decline in economic activity that lasts “more than a few months” and is reflected in real GDP, income, employment, industrial production, and trade.
Although the most widespread definition is that which says an economy is entering recession when it adds two consecutive quarters of gross domestic product (GDP) decline.
In some countries, such as Germany, small businesses have already reopened.
Based on this, most of the forecasts are being made of how we will recover from the economic impact that covid-19 and confinement measures to contain this disease are causing throughout the planet.
Although it must be clarified before the uncertainty in the face of the current crisis is great and, as the World Bank’s chief economist for Latin America and the Caribbean, Martin Rama told BBC Mundo: it is better to take “all the predictions that are made at the moment with a huge margin of error”.
The V, the ideal setting
Recessions are part of the economic cycle and, for some currents, are inevitable. So the best thing that can happen when you touch live one, is that it is V-shaped.
“Good recessions we don’t have, but the V is that steep drop with an equally pronounced output. The idea is that one returns to a level very similar to the initial level and that the recession is relatively fast… although it can last a couple of quarters or longer,” explains Tessada.
A V describes a precipitated GDP drop, with a brief apex and a steep uptick. The most optimistic predictions believe that there is still a chance that the current recession will end up taking this form. Tessada says that, right now, both the V and the U and the W “are on the table.”
“There is a suspicion that if the pandemic is controlled, we could be in the presence of a V because you could start lifting restrictions and regaining growth to previous or similar levels.”
Paul Gruenwald, global chief economist at risk rating agency S&P Global Ratings, predicts that in the second quarter of 2020 we will see a sharp drop like those in V-shaped recessions.
However, remember that to finish drawing that V you would need to climb up quickly and abruptly.
“Let’s say that social estrangement restrictions are lifted or that a vaccine or treatment develops. Then we would quickly return to the original route,” he tells BBC Mundo.
However, the possible recovery scenarios he outlines in his latest report, published last week, are not as optimistic. What will set the pace, in his view, will be how the supply side is affected: labor, capital and productivity growth.
“If none of them change, the economy will return to its original route, which is a good scenario.”
To this end, the covid-19 crisis would have to be limited to the health sector. If this happens, no supply-side items would be altered, so we “should” go back to the previous levels. It wouldn’t happen quickly enough for the Great Confinement graph to end up drawing a well-formed V, but a more “fat” one.
“But we don’t know this now, it’s something we need to follow up on over the next year or two,” he says.
The U, the most likely scenario
S&P projections for the global economy include a 2.4% fall in GDP in 2020 followed by 5.9% growth in 2021.
Something that, for Gruenwald, will be more similar to a U than a V.
“What we see now looks more like a long, wide U in which we recover most of the shock but at a lower rate,” he says.
A U-shaped recession, as Tessada explains, is one in which “you go in and out, but you stay down a little longer, as if you were having trouble getting out. You stay down, you have a hard time recovering, but over time you go out and go back to a level like the last one.”
For some economists it will be more U-like than a V.
This is the scenario seen by the managing director of Moody’s risk rating agency, Elena Duggar.
“We will not recover during the second half of the year all the production that was lost in the first. There is a lot of activity, for example in the services sector, that will not recover: all the meals that lost the restaurants, the holidays, the travel plans…”, explains to BBC Mundo.
“Much of that will be activity that GDP will lose. But we do believe that once confinement is lifted and activity resumes, it will come back and there will be a recovery during the second half of the year.”
Moody’s’ latest predictions are from the end of February and estimate an overall drop of 0.5% of GDP in 2020, followed by a 3.2% rise in 2021. All this, as long as the assumptions made by the agency are met.
“We are assuming that confinements will rise throughout the summer (from the northern hemisphere, June, July and August)… and that the activity will resume. We also assume, and we have already seen some of that, that government responses will work: we take very strong fiscal and monetary policies for granted and that they will aim to help the recovery,” Duggar ensies.
Amid the uncertainty in which these projections are made, there is one thing there is no doubt: the second quarter of 2020 is going to be economically painful.
Paul Gruenwald of S&P estimates that the fall in that quarter will reach a percentage of 9%. To him, with such a decline, it is not clear that the trajectory that the economy seemed to follow before the pandemic can be recovered. That is, the same level of production and growth that was expected by 2020.
“More than a V or a U, the question is what the final trajectory (which the economy takes). The question is: will we go back to it?… And the other question is: how long will it take us to get to this trajectory?” he says.
“We’re going to see a pretty deep contraction during the second trimester,” Duggar explains. “In China, the first quarter began. But the rest of the world, given the way the virus spreads, there is a delay of a few months… Then we expect the recovery to begin in the third and fourth quarters.”
Some economists anticipate a rather deep contraction during the second quarter.
“But the second quarter contraction is going to be so severe that it will cause negative growth figures in annual results… We’ll see how deep it will be when the data starts to arrive throughout April. All we have seen so far are indicators that there will be sharp increases in unemployment.”
However, analysts see positive signs that they think the economy will end up going back and forming that U.
“There’s good news on two fronts,” Duggar says. “We are seeing that in China the confinements are lifted, there are reopenings of factories. According to the sector, there are reports that a capacity of between 45% and 70% has been recovered… In terms of the economy’s ability to get back up and running, we see positive news there.”
“The other is that we also see strong support measures. Central banks on both sides of the ocean are acting quickly to provide liquidity to the market. We are seeing great (aid) packages in many countries.”
In its report, S&P sees positive signs that spillover curves are flattening and that government interventions are reflected in such areas as investor risk appetite stabilized or volatility falling.
The hectic W
As José Tessada says, for the time being, the entire alphabet is on the table and as Moody’s and S&P analysts warn, the duration of confinement measures play a decisive role in determining when the fall will end and recovery will begin.
S&P points out in its report some factors that could jeopardize the economic recovery, such as that, after huge public spending, governments are starting to implement austerity measures ahead of time. But Gruenwald says the biggest risk remains in the health sector.
“If we have a scenario where social estrangement relaxes and the number of infections starts to pick up and we like we’re going back and forth and we have a much slower normalization; that’s going to affect the trajectory of recovery,” says S&P’s chief economist.
A number of factors could jeopardize the economic recovery in the coming months.
A covid-19 contagion curve that goes up and down would end up causing aW-shaped recession.
“The W is when you come in and out but you re-enter (in recession). Your final recovery doesn’t happen, but in the middle there is a moment when there is an acceleration but it doesn’t hold back and you fall again,” explains Tessada.
This “agitated” path to normal would lead to production losses, as the S&P report states, which adds: “More disturbingly, we may not get a vaccine or treatment in the period covered by this prognosis, which would mean that returning to normal could be impossible.”
At the latter note, some assign the letter L: after a fall, the economy remains at a much lower rate, without recovering.
“But that, deep down, more than a recession is a permanent change in the level of growth,” says Tessada. “The typical notion of a recession is that you’re going back to the level you had before.”
And Latin America?
The World Bank expects the Latin American and Caribbean economy, not counting Venezuela, to fall by 4.6% by 2020 and to recover by 2.6% in 2021. For the chief economist of the institution in charge of this region, Martín Rama, this would outline a U-shaped recession.
“I would see it as a U in the sense that we are optimistic for next year because we think that by then the epidemiology will be better understood, there will be more ability to test, maybe also a vaccine. And we think that advanced economies, the US, Europe, China, can mobilize the financial means and have the institutional structures to bounce,” he tells BBC Mundo.
With economies strongly linked to partners such as China or the G7 countries, the ability to respond to the crisis in Latin American states will depend in large part on the speed at which these powers are recomposed, as Rama explains.
“Our fear, and why the U and not necessarily the V, is that in the months to come, the countries of Latin America are going to suffer the second phase: there will start to be companies that will not be able to cover their expenses, that will cease to workers, there will be families and companies that will not be paying their taxes , demand is going to fall, public finances are going to suffer, banks that are strong today may be affected by lower debt repayment…”
“Now, the financial needs of our countries are basically to address the medical emergency and to help people who can’t work, who are informal and who live day-to-day. These are manageable figures, but with the small fiscal space we have in Latin America, if more extraordinary measures are needed to support economic activity or to prevent a financial crisis, that is where the great risk comes,” he says.
In Latin America millions of people are quarantined.
On the one hand, the region has the “advantage” that it reaches the epidemic “a little later” and that, therefore, it was able to react quickly and has room to learn about how other countries live the pandemic.
Although, as Rama points out, there are also disadvantages: “This brings you to the region after almost five years of fairly low growth, with good exceptions such as the Dominican Republic, Panama, Colombia… But on average, in the last five years, Latin America was not convalescing but it was growing more or less like industrial countries, no more than that, with lower incomes than they did.”
Added to this is the social and political instability that erupted last year in countries such as Chile, Ecuador and Bolivia: “The social discontent we had last year for very varied reasons… shows a difficulty for a population that had gradually aspired to a middle-class standard of living, which had gradually been excited about the convergence towards south European living standards and for which these prospects are now very remote.”
He therefore calls for a reaction with the future despite the urgency of the situation: “What is done now in the emergency is also going to have long-term consequences. Keeping an eye on long-term development is important even in an emergency like this.”

Original source in Spanish

Related Posts

Add Comment