With many governments worldwide gradually starting to ease some of their lockdown restrictions, easing up the policies of social distancing, and reopening their economies, it is hoped that the global economic activity would now start to stabilise as well. Many seasoned market experts, alongside some would-be financial gurus, have almost exhausted the English alphabet trying to prophesise the type of economic recovery that would be observed in a post-pandemic world.
The most important thing to be remembered is that the market crash pertaining to the coronavirus pandemic is unlike any other economic downturn in history. By now, most experts agree that the COVID-19 health crisis and various governments' responses to the outbreak have both at the very least served as a catalyst for the turmoil that consequently swept through so many markets in early March.
Due to the unprecedented nature of the recent slump, no stabilisation of industry can be achieved without the healthcare crisis first being weathered at least to a degree. All models illustrating the various potential paths to economic recovery incorporate this one essential component – reversing the disease's rate of spread.
For this reason, in today's article we set out to expound upon the three most likely contingent scenarios outlining just that.
This is simultaneously the most popular, the most optimistic, and unfortunately the least likely suggestion, given the recent developments. A V-shaped recovery is quite easy to grasp. It assumes that the market would eventually reach a bottom if it already hasn't, which would then be followed by an equally sharp bounce back up.
The biggest issue with this projection is that it assumes too much, and is contingent on multiple uncertain factors. Chiefly, that an effective vaccine can be promptly produced on a massive scale, and distributed globally by the end of the year so that everything can return quickly 'back to normal'.
Even though the current global efforts to develop such a vaccine are unparalleled in history, most epidemiologists argue that it is much more reasonable to expect the task to be accomplished in 2-3 years. But even if by some extraordinary turn of events a game-changing vaccine is created by the end of 2020, matters of global distribution, applying it to a critical mass of people and thereby building a worldwide immunity, still remain. Hence, the eventual discovery of a vaccine is not going to be a definitive turning point in the fight against COVID-19, but rather the beginning of the final stage of the overall process.
The most significant reason justifying such expectations for a V-Shaped recovery is elucidated by the enormous sizes of the relief packages that have already been pumped into many national economies. The loose monetary policies, in conjunction with bolstered fiscal policies worldwide, are intended to reinvigorate the global economic activity by means of offering cheap capital at low borrowing rates. This is meant to sustain sufficient levels of liquidity in the financial markets during these tumultuous times, and subsequently to promote heightened spending when the economy bounces back.
The ultimate success of a V-shaped recovery rests not merely on the assumption for quick development of a vaccine for SARS-Cov-2, but also on the assumption that people are indeed going to act like before after governments ease their lockdowns. Chiefly, it is based on the assumption that people would immediately start consuming and spending just like they did prior to the pandemic, but there are myriad reasons to expect a more gradual stabilisation process. In contrast, a global V-Shaped recovery would depend on people starting to fly, going back to bars, restaurants, and other such places immediately after the lockdowns are terminated, so that the overall consumers' spending rate can normalise promptly enough.
The second-most popular alternative is also the more plausible one. In principle, a U-shaped economic recovery is very similar to a V-shaped one, with the most significant difference being the observed 'bottoming out' effect.
Here the intermediate transitionary process from a stark decline to a sharp economic expansion is more gradual and not sudden, such as the case with a V-shaped recovery. Arguably, a U-shaped recovery is at least on the surface level the most likely scenario in light of the recent developments. Given the fact that more and more governments worldwide have started to cautiously ease their lockdown restrictions, and thereby allowing for the general economic activity to pick up once again, many market experts anticipate this to show over the following weeks and months. Hence, the expectation for a gradual and smoother economic lift-off.
There is one potential impediment to such a scenario stemming from the mass market psychology. As we argued in our market insight from today:
"It would not be an understatement to assert that yesterday's rally is more reminiscent of an inflated speculative bubble than a solid bullish run. This is so because traders' optimism and expectations for the future are changing faster than the market is capable of assimilating the news."
In such a highly speculative environment in which all sorts of news can trigger major market upswings and downswings, an eventual recovery could be jeopardised by even minor developments. That is so because speculative bubbles tend to burst when the general opinions of the market change drastically in a short period of time. Thereby, unless the underlying market pressures manage to catch up to traders and investors' swiftly changing outlooks on the market in this volatile environment, the expectations for a U-shaped recovery will prove to be short-lived indeed.
The third most popular proposition for a likely recovery, the W-shaped pattern elucidates a scenario in which new downfalls follow several periods of market corrections, and then the cycle is repeated. This model underpins the high probability for a protracted recovery, which is much less clearcut than the other two.
A W-shaped recovery is almost certainly going to unfold if the development of an effective vaccine takes longer than two years, discounting all other factors. This assertion is confirmed by Jerome Powell's recent remarks concerning the dangers of a lengthy economic downturn if the health crisis is not handled fast enough.
There are also more profound economic reasons to expect such a turn of events. Despite all of the massive amounts of liquidity that have been pumped into the global economy since the beginning of the market turmoil, the inflation rates in many states have been falling. This is an early precursor of potential deflation and is also a sign of the previously alluded to lagging factor in the market's ability to discount information. In other words, the underlying market pressures are slow to find a new equilibrium, and the falling inflation rates could be a significant impediment to growth in the near future.
Because of this lagging aspect, price levels are likely to remain subdued following the complete termination of governments' lockdown restrictions. After that, the general economic activity is going to start picking up steam quite fast, which is inlined with the expectations of a V-shaped recovery. Nevertheless, this economic expansion at a bolstered rate is likely going to outpace the speed with which inflation starts growing once again.
Hence, a new debt bubble could be inflated quite fast due to the considerable levels of money supply in the global economy, coupled with the latter's inability to find a new stable equilibrium fast enough. Should this bubble burst, then the global economy could experience a new stretch of economic downfall, followed by a subsequent pick-up in overall activity.
This is how a W-shaped recovery scenario could potentially pan out, and it looks like most of our readers are indeed anticipating such turn of events.