U-Shape, V-Shape, L-Shape – modelling the possible outcomes of the Covid-19 recession

U-Shape, V-Shape, L-Shape – modelling the possible outcomes of the Covid-19 recession

As the lock down is slowly eased, speculation increases about the economic effects of the Covid-19 crisis. Clearly the economy has nose-dived since March 23rd, but the question is with such a sharp decline will the country emerge quickly out of the other side of the down turn?

Writing for the finance website Filtch economist Brian Coulton believes the health crisis will be contained in the second half of the year. He said: "Our baseline forecast does not see GDP reverting to its pre-virus levels until late 2021 in the US and Europe."

To V-Shape or not to V-Shape that is the question

The Guardian’s Larry Elliott wrote: “If history is any guide, the global economy will eventually recover from the Covid-19 pandemic, but the idea that this is going to be a V-shaped recession in the first half of 2020 followed by a recovery in the second half of the year looks absurd.”

The ideal recession is the much hyped V-shaped model which would mean things get back to pre Covid-19 levels by Christmas although as already commentated this is unlikely. Peter Hoskins of the BBC Business Desk found one example. He wrote: “A classic example of a V-shaped recession happened in America in 1953 when the booming post-World War Two economy was upended by high interest rates. After a steep decline growth was soaring again just over a year later.”

Last month the Office for Budget Responsibility (OBR) optimistically suggested that the economic recovery would take the form of the much hoped for V-shape but since then few commentators are predicting that outcome.

U-Shape if you want to

Ian Carrotte of ICSM Credit said that a more likely outcome would be the U-Shape recession with a long period where the economy  ‘bumps along the bottom.’ He said: “The classic U-Shape was the US economy in the 1970s and the British ones at the beginning of the 1980s and end of the 1980s. The economy went in  quickly to a downturn and it was a good couple of years before things picked up.”

Nouriel Roubini is professor of economics at New York University’s Stern School of Business who worked for the International Monetary Fund, the US Federal Reserve, and the World Bank is in general agreement. He said: “After the 2007-09 financial crisis, the imbalances and risks pervading the global economy were exacerbated by policy mistakes. So, rather than address the structural problems that the financial collapse and ensuing recession revealed, governments mostly kicked the can down the road, creating major downside risks that made another crisis inevitable. And now that it has arrived, the risks are growing even more acute. Unfortunately, even if the Greater Recession leads to a lacklustre U-shaped recovery this year, an L-shaped great depression will follow late.”

Nightmare of the L-shaped room

If the Credit Crunch of 2008 was U-Shaped and the 1953 recession in the US was V-shaped then it is difficult not to admit the prolonged depression of 1929-1939 was anything other than L-shaped. Only the mass production and full employment brought about by the build up to World War Two changed gears in the economy. An L-shape recession is a possibility in 2020 for several reasons. It’s global, there may not be a vaccination, huge numbers of businesses have gone bust, traditional sectors like retail, travel and hospitality have been mortally wounded and unemployment has increased.

“There is a recession coming,” said Ian Carrotte, “but strangely enough Covid-19 will come to the rescue of many firms. Any business that collapses when the furlough scheme ends can blame it on the virus, while many firms that have a successful business model but no money could phoenix and start again. It might even become socially acceptable to do that as so many businesses are in the same situation.”

Having experienced four recessions Ian Carrotte said each one is different and nobody knows how this one will pan out. “Inflation remains low, internet business has rescued many firms, and oil prices are low keeping transport costs down,” he said. “Looking back to the past it is not possible to find a parallel. Not even the flu epidemic of 1918. Then people knew the flu spread in large gatherings but they simply got on with life. Perhaps that is something we will have to do in the end as social distancing is like a handbrake on many aspects of business.”

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For details for the work of the journalist Harry Mottram visit www.harrymottram.co.uk

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