Recession is over. What shape will recovery take?
With economic data pointing to April as the low point in the cycle, and states slowly reopening their economies, uncertainty remains the keyword about recovery, with many questions unanswered.
What will the economic recovery will look like? What shape will it take? Will there be a second wave of COVID-19? And if so, how far back will it set recovery?
“On the strict definition of a recession, yes, the recession is over,” said Lee Ferridge, head of macro strategy for State Street. “April was the low point and we are slowly recovering from there and so, Q3 will see positive growth relative to Q2. Hence, on the strict definition of a recession then it will end in Q3 after negative growth in Q1 and Q2.”
Monetary and fiscal policy enacted quickly after the economy shut may mean recovery will take less time than normal, said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “But additional volatility lies ahead,” he warns.
Ferridge does not see a V-shaped recovery. “I am very much in the ‘swoosh’ camp or, to get more technical still, in the ‘inverted square root sign camp,” he said. “This sign shows a big collapse in March and April, a reasonably strong recovery in late Q2 and early Q3, which takes us the majority of the way back to where we were, but then fairly flat activity until we get a vaccine that is widely distributed. The recovery will be very uneven with hospitality, travel, concerts/sports likely to be very slow to recover whereas other sectors of the economy (that don’t require social interaction) could snap back, close to where they were, even before a vaccine.”
However, the economists at Morgan Stanley are confident that chances for a V-shaped recovery have grown based on recent data releases.
“We have greater confidence in our call for a V-shaped recovery, given recent upside surprises in growth data and policy action,” wrote Chetan Ahya, Derrick Kam, Nora Wassermann and Frank Zhao in a recent report. “We think that a new expansion cycle has begun. Since early April, our view has been that this recession will be sharper but shorter — global and DM output levels will reach pre-COVID-19 levels by 4Q20 and 4Q21, shorter intervals of four and eight quarters, respectively, versus six and fourteen quarters during the global financial crisis.”
As states re-open some have seen coronavirus infection rates climb. So what about a second wave? Director of the National Institute of Allergy and Infectious Diseases Dr. Anthony Fauci says a second wave of COVID-19 cases “is not inevitable.”
“It is not inevitable that you will have a so-called ‘second wave’ in the fall, or even a massive increase if you approach it in the proper way,” he said, while advising people to maintain social distancing and to continue to wear masks in public.
But, Ferridge remains “very worried" about a second wave. “I believe that evidence it is likely to happen (or indeed is already happening) is very strong,” he said. “For now, the market is ignoring this as it believes that we are not going to go back into lockdown."
Hospital capacity will determine if another shutdown is needed, he said. "While there will be a strong desire to avoid any new lockdowns, much will depend on medical capacity," he said. "If hospitals start to reach capacity again, governors may have little choice but to restrict activity once more. This is unlikely to be as widespread and strict as we saw previously, but given that so many states are now seeing rising numbers once more (22 have seen cases increase by over 25% over the last week) it will still impact the pace of recovery and hence, should be negative for risky asset markets.”
So how much of a setback would a second wave be? “Any subsequent lockdowns are unlikely to be as widespread and strict as we saw previously,” Ferridge said. “However, the fact that a second wave seems likely and if we couple this with evidence from elsewhere, then it seems clear that until there is a vaccine we will not be able to return to anything close to normal activity."
Work from home will remain the norm for those who can, social distancing in restaurants/bars will be in place until a vaccine is available and travel will be severely reduced, he said.
"What is more, this is only likely to get worse as we enter the fall/winter," he said. "For now restaurants/bars can use outside space, that gets much harder in large parts of the country from October onward. So any second wave will not take us back to the low point in activity seen in April but will mean that any recovery (after the Q3 bounce) is very slow indeed."
But, at least one noted economist, Diane Swonk, chief economist at Grant Thornton, believes recovery will be slow. “Real gross domestic product is forecasted to drop a stunning 7.9% in 2020,” she said. “Efforts to hasten reopening before guidelines recommended by the CDC have virtually guaranteed a slower recovery as infections are picking up again — that acts as its own tax on economic activity. People have routinely shown their willingness to stay away from public places once infection rates spike.”