The alphabet of economic recovery
7 min read
07 Apr 2021
7 min read
07 Apr 2021
With Covid-19 vaccine rollouts well underway across the world, will there be an automatic recovery from the economic turmoil of the past year? Which letter of the alphabet would best describe the shape of any recovery?
As multiple Covid-19 vaccines are now being made available across the globe, there are heightened expectations of a swift and dramatic economic recovery from the devastation wreaked by the pandemic.
However, those expectations may need to be tempered and nuanced, say economists, as a vaccine may not be the silver bullet that slays the economic downturn. “The vaccine is only a necessary condition for the recovery, it’s not sufficient on its own,” says Sarah Hunter, Chief Economist at BIS Oxford Economics. “Fiscal and monetary supports will need to remain in place for quite some time, to allow businesses and people to fully adjust to the post-COVID normal.”
The shape of things to come
Questions remain as to when the recovery will occur, what it will look like and what shape it will take.
Would it be a ‘V-shaped’ recovery, where there’s a sharp upturn after a quick decline, a ‘U-shaped’ recovery, where there could be months, even years, between decline and recovery, or a ‘W-shaped’ recovery, also called a ‘double dip’, where the economy picks-up only to fall back into a recession? Or will it be a ‘K-shaped’ recovery, where there’s a sharp divergence between winners and losers?
“There will not be a one-size-fits-all shape for the global economic recovery,” says Agathe Demarais, Global Forecasting Director, The Economist Intelligence Unit. “Most G7 countries will take until 2022 to see their economy recover to pre-coronavirus GDP levels. However, emerging countries, such as Mexico and South Africa, will on average take longer, with timelines stretching until 2024. Global GDP will not recover to pre-coronavirus levels before late 2021 or early 2022.”
A Global Risk Survey conducted amongst the world’s largest businesses by Oxford Economics points to most businesses expecting a relatively gradual recovery of growth, with only 11% of respondents anticipating a V-shaped recovery. “41% of respondents expect an incomplete V-shape recovery, sometimes referred to as a ‘square root’ recovery, with growth initially recovering but then being relatively subdued,” says Jamie Thompson, Head of Macro Scenarios at Oxford Economics.
A sharp rebound or a rebound followed by a levelling off?
Following the emergence of the Covid-19 virus in Wuhan more than a year ago, the Chinese government imposed severe containment measures across the country. The GDP contracted by 6.8% in the first quarter last year, before returning to 3.2% growth the very next quarter. The country now looks set to make a V-shaped recovery, and the country’s leadership touted China’s economic resilience at the Central Economic Work Conference in mid-December last year.
However, state-led investments and stimulus efforts coupled with China’s traditional strength of exports have led to the recovery, causing some concerns about its sustainability. Consumer demand within China and private investment in manufacturing still lag pre-pandemic figures. The costly and debilitating trade conflict between China and its largest trading partner, the United States, looks unlikely to be resolved under the Biden Administration. Demarais says: “The overarching nature of the conflict between the US and China will remain the same. The view that the two countries are competitors is now firmly held in both Beijing and Washington.”
Initial data does show, however, that consumer activity around this Chinese New Year not only increased 30% over last year but also posted a modest growth over the corresponding period in 2019. Although the weeks leading-up to the Chinese New Year traditionally register a sharp uptick in economic activity, this year’s numbers could be strongly indicative of improving consumer sentiment.
In the near future, at least, Reuters reports that analysts expect economic growth to rebound to 8.4% in 2021, before slowing to 5.5% in 2022, portending a ‘square root’- shaped recovery.
A long night before the dawn
The EU has been amongst the hardest hit by the pandemic, with an 11.9% GDP contraction, the steepest in modern times. The delayed vaccine rollout and continued lockdowns and social restrictions have belied initial hopes of a sharp V-shaped recovery. A survey by the thinktank Conference Board shows a majority of European CEOs expecting a ‘U-shaped’ recovery, a protracted period of stagnation before a recovery.
“We expect the 2021 rebound to be the strongest in the Eurozone’s history. Still, the shock has been so severe that Eurozone GDP will not return to pre-crisis levels until 2022,” says Thompson.
The UK may be in worse shape, as much of its economy is built around customer-facing services that have been severely impacted. The continuing uncertainty around Brexit doesn’t help either. Jonathan Portes, Professor of Economics and Public Policy at King’s College London was quoted in a Financial Times article saying, “On current trends, the recovery will be K-shaped: those who work in relatively well-paid jobs that can be done from home will have lots of surplus savings to spend, while those in lower-paid, customer-facing and insecure jobs will continue to struggle.”
Exacerbating existing differences
Despite the US claiming a huge economic recovery in October last year, its economic recovery has not been ‘V-shaped’. If anything, the recovery has been ‘W-shaped’, with the growth and recovery mirroring the repeated imposition and lifting of restrictions and stimulus measures.
Economists, however, point to another letter of the alphabet that shows the shape of what’s happening. “The last year has clearly been K-shaped,” said James Manyika, chairman of the McKinsey Global Institute, in an interview with the Financial Times.
The largest corporations had a stellar year, with the S&P 500 up nearly 16% and Nasdaq up 44% for the year. In the same period, smaller businesses, especially in the services industry, have struggled for survival. By the end of 2020, American billionaires added more than 930 billion USD to their net worth while unemployment nearly doubled to 6.7% from its pre-pandemic figure of 3.5%.
The writing on the wall
The Covid-19 pandemic has exposed and worsened existing fault lines across societies and industry and accelerated trends that were already occurring.
The K-shaped divergence, between the haves and have-nots of society, has been exacerbated. The prolonged economic turmoil in many countries is causing discontent to be expressed in dangerous ways.
Even in business, many of the largest companies that dominate their sectors have thrived, while small businesses have struggled. Companies that already had the ability to invest heavily in digitisation for their employees and customers have done remarkably better than their peers.
Countries that imposed early and severe lockdowns, combining them with broad fiscal stimulus efforts, like China and India, have weathered the worst of the storm and are likely to see a V-shaped recovery. The successful rollout of vaccines and aggressive fiscal and monetary stimulus efforts are needed if other countries are to stand a chance of making a V-shaped recovery, and not a painful ‘double-dip’ recovery that follows the ebb and flow of virus outbreaks.