Alphabet soup of economic recovery scenarios

The most important question on reopening the global economy is what will the path to recovery look like?

Will it be V-shaped or U? Or will it be a “Nike swoosh”? Economists are serving an alphabet soup of predictions on recovery following the COVID-19 pandemic.

In early April, policy makers and the business community were pinning their hopes on a V-shaped recovery, which is characterized by a sharp economic decline followed by a rebound in the third quarter.

However, towards the end of April and beginning of May, there was a clear shift in the corporate sentiment which shook everyone’s belief in a quick sustained recovery.

Norwegian Air Shuttle said it expected to stay in “hibernation” for the next 12 months and would only resume normal operations in 2022. British Airways then announced 12,000 redundancies and said it would “take several years” to return to last year’s passenger levels. Furthermore, the hospitality industry warned that surviving a prolonged lockdown would be challenging. A column in the Financial Times aptly described this as “V for victory” turning out to be “V for vain hopes”.

According to a Reuters poll of 34 fund managers and chief investment officers across North America, Europe and Japan with over $2.5 trillion assets under management between 16th to 30th April, 60 per cent of managers said the global recovery would be U-shaped. Pascal Blanqué, chief investment officer at Amundi, said the curve will have “a long bottom phase and a likely recovery at the end of 2020 or beginning of 2021”.

But economists and corporate pundits are now moving away from the idea that the curve will be described by a single alphabet. Last week, when asked about this at the FT Global Boardroom online conference, Kevin Sneader, Global Managing Partner, McKinsey & Company, said consensus has been settling on a “swoosh” style recovery.

Named after the Nike logo, it predicts a large drop followed by a very slow recovery, with many Western economies, including the U.S. and Europe, not back to 2019 levels of output until late next year or beyond. Whilst there is growing uncertainty around how the global economy will recover, there is one point that everyone is beginning to agree on. Sustained recovery will depend on containing the pandemic as effectively as possible and the development of a vaccine, which in turn will help restore consumer confidence.

Federal Reserve chair Jay Powell has said the US economy may not “fully recover” until there is a vaccine. Meanwhile, talking at the FT Global Boardroom conference, Bank of England Governor Andrew Bailey proclaimed that a vaccine will have the biggest benefit on the world’s economy.

The COVID-19 crisis has highlighted that public health is inextricably linked with economic recovery. A new study co-authored by an economist at Massachusetts Institute of Technology uses data from the flu pandemic of 1918 – 1918 to show that taking care of public health first generates a stronger economic rebound later. Fight the pandemic, save the economy.


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