As economies around the world take their first, tentative steps toward restarting, Canadians are beginning to wonder what life may look like on the other side of this pandemic.
The answer to that open-ended question depends in large part on what sort of recovery we are looking at.
When asked to weigh in on the shape of things to come, one of the best ways economists have come up with to lay out the options is based on letters of the alphabet.
Will the recovery look like a V or more like a U? What about a Nike “swoosh” or something wobbly like a W? Or the worst case scenario — will we take the dreaded L?
Even the chair of the U.S. central bank finds himself talking about these ABCs of late instead of his usual ones, twos and threes.
“Yeah, there are letters,” Fed chair Jerome Powell told 60 Minutes on Sunday. “People are fascinated by the possibility of different letters.”
“In the long run, and even in the medium run, you wouldn’t want to bet against the American economy. This economy will recover. It may take a while… It could stretch through the end of next year,” says Fed Chairman Jerome Powell. <a href=”https://t.co/q3xeeDSdro”>https://t.co/q3xeeDSdro</a> <a href=”https://t.co/aSsrzimp4y”>pic.twitter.com/aSsrzimp4y</a>
Powell said he thinks the economy will begin to recover in the second half of this year, but the future, as always, is uncertain.
He’s not the only one having trouble spelling it out.
“Everyone’s turned into a geometrist,” said Karl Schamotta, chief market strategist at foreign exchange firm Cambridge Global Payments. He said there’s been a lot of talk about the various letter shapes of a recovery, with only one consensus emerging so far
“There’s virtually no one who thinks there will be a V-shape recovery,” he said.
The front end of the crisis has happened and certainly looked like the start of a V — a steep, straight drop. The question is how fast and how sharply the economy will surge back to life or whether it will linger for longer at the bottom and take its time climbing back.
Schamotta believes the most likely scenario is a more gradual climb back — “something like a Nike swoosh,” as he describes it.
The shape of things to come
That’s because Schamotta and most experts believe nothing about this crisis will be straight forward. Even a long slow climb back to normalcy will be come with setbacks.
One dreaded scenario is the so-called W-shaped recovery. Just as the economy opens up and begins to rebound, a new outbreak will force everything to close down again. Some models predict many stops and restarts; a series of W’s with reopenings and closings as outbreaks occur.
And different sectors will reopen and readjust differently.
“Across industries, no two recovery paths are likely to be identical,” TD Bank senior economist Brian DePratto said in a research note.
TD Bank sees most sectors of Canada’s economy recovering in one of three ways.
Arts, entertainment, travel and tourism are projected to see an L-shaped scenario with a huge plunge and a long path back to some semblance of normalcy.
That’s bad news for cruise ships and hotels, but other businesses are looking at much more optimistic recoveries.
“Some sectors, such as food retailers and transportation, are likely to see only a modest near-term hit and a quick recovery, placing them among the Vs,” DePratto said.
The rest of the economy is probably looking at a U — a sustained period of pain followed by an eventual, gradual rally back up to where they were before this all started.
Unlike any other recession
The near universal uncertainty around this crisis is just one of the things that sets it apart from previous downturns.
“This is not an economic event, this is a health event,” said Goldy Hyder, the president and CEO of the Business Council of Canada.
As such, he said navigating the pandemic requires everyone to think differently.
The 2008 financial crisis was staggering in its size and scope at the time, but, by comparison it was a fairly simple crisis to manage.
Policymakers took action to prop up financial infrastructure, leaned on traditional stimulus programs to get people back to work and lowered interest rates to encourage consumers to borrow and spend.
Once the economy bottomed out, the climb back was fairly swift.
This one likely won’t be because it’s a different type of recession.
“We’re dealing not just with a medical virus that has impacted how we behave,” said Schamotta. “We’re also dealing with a psychological virus and the question now is when do we feel comfortable, when do we return to those behaviours?”
Fear is spreading like a virus
Hyder agrees and said instead of traditional stimulus, what’s needed is a boost in confidence.
“There is no jumping into the deep end here,” said Hyder. “There is tiptoe your way in, one step at a time from the shallow end.”
Consumers are scared and worried about spreading the virus, Hyder said, and businesses know the risk of reopening too early.
“What happens if you open up the economy and no one shows up?”
Hyder said you can flip a switch and open stores and services, but convincing consumers to return to previous habits will be a tougher task. Any recovery model would be wise to remember that.
“It’s not any letter, it’s an oscillator fan,” said Hyder, and that scenario would come in and out of recovery for a long period of time.
“Multiple Ws together is a scenario that many people feel is possible.”
It may be daunting and disheartening to imagine the many ways in which the recovery can derail, the ways in which the outbreak may linger and dampen economic growth for a longer time than we initially thought.
But Schamotta has one caveat to all the worst-case scenarios.
“Humans have very short memories,” he said. “It’s extremely likely that human beings become fatigued of this and move on and snap back to old behaviours.”
Schamotta said that because humans have an innate desire to get back to something they recognize as normal, and that’s likely to be the case this time around, too. What shape that new normal takes is anyone’s guess, but with the alphabet soup of options on the table, one thing is certain: COVID-19 needn’t necessarily spell doom for the world’s economy.
View original article here Source