Recessions characterized by a sharp deceleration in economic growth are often followed by a strong acceleration. Hence the origin of the nomenclature a “recovery in V”.
Given the sudden, severe and exogenous nature of the current slowdown, the start of which will probably be dated March 2020, economists initially expected a V-shaped recovery.
This is probably not the case. While it is true that the recession was brought about by the forced shutdown of large swathes of the US economy, a reopening is not about to produce a proportionate rebound.
Digging out of the deep hole will be neither quick nor easy.
Instead, deep psychological scars are likely to persist, with a concomitant effect on behavior on the part of consumers and businesses.
Many individuals and businesses have seen their lives and livelihoods turned upside down in a flash. After being deprived of the resources to pay the rent or mortgage, cover health care costs, or feed the family, consumers may find themselves rethinking their shopping mentality until the end. And consumer spending accounts for almost 70% of economic production adjusted for inflation.
After the Great Depression of the 1930s, the personal savings rate soared as households came to appreciate the benefits of savings. This is likely to happen again once households have the means – a job and a paycheck – to start saving.
With medical experts warning of a second wave of infections later this year or next year before a vaccine is available, Americans are less likely to go to restaurants, attend sporting events, going to the theater or taking a vacation involving air or boat trips.
Businesses, on the other hand, are likely to replace business travel and related entertainment expenses with video conferencing. Disrupted global supply chains will take time to rebuild or reorganize. Businesses will likely see their costs for things like health care and paid sick leave increase.
Business fixed investment, which fell in the second, third and fourth quarters of last year in response to the trade war, will not increase rapidly when social distancing is the norm.
The sudden onset of a national foreclosure, with no time to prepare, could trigger a wave of corporate bankruptcies and delinquent loans that have a snowball effect on lenders.
With the entire global economy imploding from the coronavirus shutdown, foreign demand for US goods and services is not going to offer much comfort. Failure to acquire the necessary personal protective equipment and ventilators during the pandemic is likely to encourage countries to become more islanders, thereby reducing international trade and the benefits it offers.
and at-risk assets will only exacerbate the anxiety of losing a job or closing a family business.
Digging out of the deep hole will be neither quick nor easy.
The Great Recession ended in June 2009, but real gross domestic product did not overshadow its peak from the fourth quarter of 2007 until the second quarter of 2011.
Economic growth is expected to suffer an even bigger blow this time. The Congressional Budget Office projects real GDP to drop 7% in the second quarter, an annualized rate of 28%. Some private sector economists predict a more pronounced drop of 35% to 40% on an annualized basis, more than four times the 8.4% drop recorded in the fourth quarter of 2008, which was the worst quarter of the last recession.
And even with projections for a solid rebound in growth in the third and fourth quarters, assuming the economy reopens by then, GDP growth is expected to drop significantly for the year. Goldman Sachs economists expect real GDP to contract by 6.2% on average annually in 2020, which would be the largest annual decline since 1946.
Like GDP growth, job losses this time are likely to be more devastating than during the previous recession, despite the policies put in place to stem the tide. In the two weeks ending March 28, nearly 10 million people claimed unemployment benefits, wiping out job gains over the past five years.
The total likely underestimates the severity of the job losses due to difficulties in applying (long wait times on the phone or on crashed websites).
Economists expect the unemployment rate to easily surpass the record 10.8% recorded after the Second World War from November 1982, with some forecasters looking for a rate of 15% in the second quarter.
Read also: Rising unemployment rate in the United States could approach the levels of the Great Depression
CBO, conceding that its economic projections are “very uncertain at the moment”, expects the unemployment rate to reach 12% in the current quarter and remain high, falling to only 9% by the end of 2021.
The CBO said its predictions were based on “the possibility of future virus outbreaks”, which would require further social isolation. He expects that “the effects of job losses and business closings will be felt for some time”.
It took almost five years after the bottom of the June 2009 recession for employment to return to its pre-recession peak. It is not far-fetched to anticipate a similar slog this time.
The 2.2 trillion dollar economic rescue program, or CARES law, is designed to mitigate these job losses and provide relief to businesses and workers.
The Small Business Administration’s paycheck protection program offers repayable loans covering payroll, rent, mortgage interest or utilities to small businesses that keep their workforce for eight weeks. The program is retroactive to February 15, which means that companies that laid off workers before the law was passed can be rehired to qualify for loans.
The $ 349 billion CARES law allocated to SBA loans may not be enough to support small businesses, according to the National Federation of Independent Businesses’ latest small business optimism index.
The March index fell 8.1 points, the largest monthly decline in the history of the survey. “Half of the small employers said they could not survive more than two months under current commercial conditions,” according to the NFIB.
On Tuesday, members of Congress were working to make an additional $ 250 billion in loans available for the SBA program.
The relief program also offers help to those who have lost their jobs. It extends unemployment benefits to the self-employed and to independent contractors, increases assistance by $ 600 per week for four months, and extends the duration of benefits from 13 weeks to 39 weeks.
In addition, the federal government issues checks of $ 1,200 to eligible individuals.
Legislators already considering around $ 1 trillion in phase four relief program, members agree on the need to provide more support to businesses and households rather than money for infrastructure investments .
There will come a time to repair the country’s roads, bridges and tunnels, but right now, we have to fix people’s lives: at least restart them until things get back to normal.
The fiscal stimulus can wait for such a time when businesses and households can react, which hopefully will give a boost to an L-shaped or U-shaped recovery. Until then, the expected V-shaped recovery will be out of reach.