How long will it take for economy to rebound?
Projections of rapid bounce off bottom no longer consensus for many experts
The global economic downturn has transformed economists into part-time geometrists.
It might seem early, but part of assessing the extent of the damage to GDP requires mapping out when a recovery takes place — and there’s a substantial difference in the shape of models depending on those timelines.
To describe their projections, most economists turn to letters of the Latin alphabet.
A V-shaped recovery sees a steep decline in GDP being met with a rapid bounce off the bottom, whereas the dreaded L-shape spells recession, with GDP failing to return to its pre-crisis levels for years.
The process involves more creativity for others who say no letter — at least none from the latin alphabet — can accurately describe their models. The shapes are just wrong. Rather, they cite the Nike swoosh, a square-root symbol, or even the letter “Baa” of the Arabic alphabet.
“I don’t think a letter is going to neatly capture what we’re going to be looking at,” said Douglas Porter, chief economist at BMO, when asked what shape of recovery he was anticipating.
Only three weeks ago, a simple letter did work for many economists. When the outbreak was in its initial stages, most were betting on a V-shaped recovery taking place. The optimistic scenario then involved the novel coronavirus outbreak peaking in April or perhaps May and the economy returning to normal soon after. But as the number of cases continues to balloon and social distancing measures are extended, economists have been forced to readjust on the fly.
And now there’s no consensus at all.
Porter’s base case still has some elements of a V-shaped recovery in it. GDP bottoms out in April before beginning to recover through the second half of the year. Unlike the traditional “V,” however, the righthand slope will not continue to rise after catching up to pre-crisis levels and GDP will essentially be flat from the final months of 2020 on through 2021.
Invesco global market strategist Arnab Das has neatly dubbed this form of a recovery as the “square root.”
The only difference between his chart’s shape and that of Porter’s is that Das sees the flatline occurring well before growth reaches prior levels. The global economy would have to endure a repair period for a few years before that would be possible, he said. After the financial crisis, for example, it took U.S. GDP growth four years to return to the norm.
When it comes to Canada, Porter is more optimistic — for now. Next week, he expects his team will have to review their current base case yet again once it has a clearer idea on how long social distancing measures are going to be in place.
“I still think the economy does come back robustly in the second half of the year assuming social distancing lightens up in the summer,” said Porter, who expects consumer demand will be pent up and unleashed when those measures are lifted. “If we’re wrong on that front, clearly we’re wrong about a recovery as well.”
A “V,” an “L” and a “U” are all out of the equation for Rosenberg Research & Associates economist David Rosenberg who thinks GDP will recover in the shape of a Nike swoosh with a tail made up lower-case w’s.
GDP growth is linked directly to spending and that won’t pick up again, Rosenberg said, until a vaccine is developed. The most optimistic schedule for one remains locked in a 12- to 18-month timeline. Society will look much different before one is introduced, even if social distancing guidelines are lifted — something Rosenberg expects will happen in small stages throughout the summer. Real growth will likely only come in the fourth quarter, he said.
Canadians may go back to work, but there is no indication that they will begin to spend in the same way they did in 2019. What Rosenberg expects is for the savings rate to escalate. Consumers will quickly want to access some of the services, such as hair cuts, that they’ve been stripped of during the shutdown, but no one will be stepping on an airplane.
“It’s going to be social distancing light,” said Rosenberg.
Then, just as Canadians think they’re through the worst of it, they ’ll have to deal with the necessary spending governments made in order to bring the country out of crisis. Rosenberg said repercussions will either come in the form of tax hikes or central banks monetizing the debt and ramping up inflation.
“There’s going to be a price to pay for ensuring the system is saved,” Rosenberg said. “There’s no getout-of-jail-free card.”
There’s going to be a price to pay for ensuring the system is saved. There’s no get-out-of-jailfree card.