Economists are becoming less convinced about the potential for a quick strong snapback in economic growth after the coronavirus crisis ends.
The base case for forecasters is that a recovery, perhaps even a vigorous one, will get underway in the second half of this year. But as the pandemic spreads through Europe and the Americas, and the wide range of knock-on effects comes into clearer view, caveats to that call are piling up.
Underlying all of them is the fact that economic outcomes hinge on something that's beyond the professional competence of most economists to forecast: the trajectory of the disease itself.
"We have no certainty the virus will be gone by the end of the second quarter," said Nobel Prize winner Joseph Stiglitz, a professor at Columbia University in New York. If it "lasts through the summer, then all the effects will be amplified."
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Beyond that, there is an array of questions for economists to grapple with -- and those doubts increasingly undermine projections for what's known as a "V-shaped recovery," in which lost output is quickly restored.
Rather than sounding a decisive "all clear," health authorities seem likely to advocate a gradual return to normal working life, so the behavior known as "social distancing" may stick around.
Along with financial blows during the downturn, is likely damped spending on travel or spending at shops or restaurants -- assuming those businesses can stay afloat in the first place.
"It takes more time to get 'back to play' than to 'get back to work,'" said Catherine Mann, chief economist at Citigroup Inc. This "underpins concerns for the trajectory for services-dependent advanced economies in the second half of 2020," she said.
Consumer caution is already evident in China, even though authorities say it's safe to go back into the marketplace.
That's why Mark Zandi, chief economist at Moody's Analytics, likens his forecast to a "Nike swoosh" rather than a V- or U-shaped rebound. He says U.S. output alone could plunge at an annualized pace of as much as 25% in the second quarter, bounce back by up to 15% in the third, then stall in the fourth with the economy "basically limping along."
Much will depend on how fast businesses bring back jobs. The International Labor Organization warns that 25 million positions may be shed, and Goldman Sachs Group Inc. said Tuesday that it expected U.S. unemployment to soar to 15%.
Mckinsey & Co. notes that one quarter of U.S. households already live from paycheck to paycheck, and that 40% of Americans are unable to cover an unexpected expense of $400 without borrowing.
Stiglitz worries about what he calls "financial gridlock" in which households and companies can't pay bills, forcing those they owe into bankruptcy and default as well, and so on.
That threat could be heightened by the scale of borrowing in recent years. The Institute of International Finance estimates household debt -- as a share of output -- is at record levels in several economies.
Corporate borrowing has also hit a high in countries, including France and the U.S. Those debts along with the collapse in earnings and slide in equities may limit the ability of companies to reboot after the crisis, with some also likely to be hurt by the collapse in oil prices.
"In any recovery, firms may need to sell shares or slash capex [capital expenditures] to reduce debt or repay government assistance," said Charles Dumas of TS Lombard.
Keen to avoid an extended recession, policymakers have been taking emergency measures on a scale that likely exceeds even the response to the 2008 financial crisis. They're extending credit lifelines to business, paying cash to households, and helping companies cover their wage bills so they don't have to fire workers. Central banks have slashed interest rates and started new asset-purchase programs.
The strongest argument for a rapid recovery is what economists call "pent-up demand" -- a label that applies literally in the current crisis.
Economies shuddered to a halt when people were forced to hunker down at home, so there should be a corresponding upswing when they're allowed out again -- especially with governments everywhere injecting cash to speed the process.
"Assuming the outbreak peaks by April/May, this will likely set the stage for a recovery in the second half of 2020," said Chetan Ahya, chief economist at Morgan Stanley.
He predicts the global economy will contract 2.3% on an annualized basis in the first half of the year before growing 1.5% in the second half. Even that scenario means the U.S. and euro area won't regain their pre-crisis levels of output until the third quarter of 2021.
At JPMorgan Chase & Co., economists led by Bruce Kasman are citing emerging markets as another source of concern. They're being pinched by gains in the dollar and the outflow of foreign-held capital, pushing up local borrowing costs.
The most encouraging virus news for economists at the moment comes from Asia, which suffered the first outbreaks but appears to have gotten them under a degree of control.
China is cranking back into action, with numbers released recently showing manufacturing activity rebounded strongly in March.
Demand in the domestic market is reviving, as lockdowns ease and consumers return to the shops or showrooms. Auto sales, for example, have been ticking higher for weeks, though they're still down some 40% from last year's level.
And in China, as in other countries, economics will continue to depend on epidemiology for some time to come. Even as overall progress is made toward containing the coronavirus and developing a vaccine, there's no guarantee that the movement will be in one direction.
Instead there could be "aftershocks following the initial outbreak, with restrictions being re-imposed and lifted so as to manage the capacity of the health care system to cope," said Keith Wade, chief economist at Schroder Investment Management. "In economic terms, this would lead to a double-dip recession."
SundayMonday Business on 04/05/2020