The coronavirus is guaranteed to throw the world into recession, but economists are becoming less convinced about the potential for a strong snapback in growth.
The base case for forecasters is that a recovery, perhaps even a vigorous one, gets under way in the second half of 2020. 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 simple 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 prizewinner Joseph Stiglitz, a professor at Columbia University in New York. If it “lasts through the summer, then all the effects will be amplified.”
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 sustained during the downturn, that is likely to damp 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, and it could happen elsewhere.
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 25 million positions may be shed, and Goldman Sachs Group Inc. said on Tuesday it expected U.S. unemployment to soar to 15%.
Mckinsey & Co. notes 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 to 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.