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How fast will the American economy recover? That depends on the coronavirus

2020-04-02T18:42:27.947Z


The question is no longer whether we will have a recession, but how deep it will be and how fast the economy will recover. Economists will say that options are V-shaped, L-shaped, and U-shaped ...


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New York (CNN Business) - A month ago, the big question about the economy was: Will we have a recession?

How funny that seems now.

That was before airlines canceled thousands of flights, sports leagues stopped their seasons, and restaurants and retailers closed their doors. Schools and kindergartens had not closed and social interaction was not yet limited to two meters and Zoom conference calls. Now Americans are hiding inside their homes and millions have applied for unemployment benefits.

So the question is no longer: will we have a recession ?, but how deep will it be? And how fast will the economy recover?

You will hear economists throw phrases like V-shape, L-shape, and U-shape to describe the range of possibilities.

V-shape: The hope is that, given the trillions of dollars in government aid, the economy will be able to flip a switch as fast as it goes out. Once the spread of the virus slows down, companies will be able to open their doors, people will return to work, and the economy will recover quickly. That's what economists call a V-shaped recession, and some think it's possible, now that the Federal Reserve and Congress have pledged billions of dollars to rescue the economy.

But that scenario is highly dependent on the virus.

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Morgan Stanley economists predict a sharp economic decline followed by a rapid rebound. They predicted that the US gross domestic product It will contract at an annual rate of 30% in the second quarter, much deeper than any other quarterly decline on record. But after that, they believe that GDP will grow at an annualized rate of 29% from July to September.

As dire as it sounds, it is actually an optimistic forecast, because no one knows how long it will take the United States to contain the coronavirus pandemic and relax measures of social distancing. Morgan Stanley's prediction assumes that the outbreak peaks in April or early May, with companies reopening shortly thereafter.

Form of L: The worst case scenario is that the virus is not contained, social distancing measures remain in force during the summer and it will take years for companies and consumers to catch up. In that case, the economic recovery could be L-shaped.

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That is what happened after the Great Recession. Economic activity took four years to return to its pre-recession peak. Even then, most Americans still did not feel that they had recovered.

The Great Depression, which began in 1929, was even more severe and was followed by a painfully slow recovery that lasted until World War II. Those L-shaped retrievals are more like a hockey stick with a long tail. No one wants an L-shaped recovery, and so far, most economists have not predicted this outcome.

U-shaped: There is also an intermediate scenario: it is the U-shaped recession, and it could be the most likely one today.

A U-shaped recession is like a bathtub, said Simon Johnson, former chief economist at the International Monetary Fund.

"You come in. You stay. The sides are slippery. You know, maybe there are some things with bumps in the bottom, but you don't get out of the tub for very long, ”he told PBS in 2009. In other words, the economy is contracting, staying moderate for a while, and then rising again.

This is a plausible result after the coronavirus pandemic for some reasons.

Companies, even with government help, will face greater uncertainty about the future. For business owners and managers, the pandemic made a previously unthinkable situation real. Now that they have experienced a scenario in which companies are suddenly closing en masse across the country, that shock could damage their investments and change behavior in the future, causing some to spend more conservatively.

Although companies will eventually come to life after social distancing measures are lifted, it won't happen once and for all.

As for consumer spending, the largest contributor to America's economic activity, it is also unlikely to recover immediately. Part of that is due to a decrease in earnings, especially for workers who have been temporarily laid off or laid off.

But there is also a psychological impact, said Elena Duggar, president of Moody's Macroeconomic Board. The coronavirus pandemic has already disrupted human behavior in dramatic ways, from social distancing to panic purchases of toilet paper. Consumers will probably be careful to make big purchases even when the economy begins to recover. They are unlikely to suddenly return to their pre-coronavirus spending levels, Duggar said.

Finally, the expense that would have taken place in the second quarter will not necessarily be offset later in the year. Tourists whose spring break trips were canceled will probably not take two summer breaks. Consumers are not going to eat twice as many meals in restaurants or go to twice as many movies later in the year, simply because they missed those things in the spring.

"There will be a significant part of economic activity that will be permanently lost," said Duggar.

However, businesses and consumers will eventually recover, and could do so faster than they did after the Great Recession, Duggar noted. Hence his U-shaped forecast.

Uncertainty and unknowns

However, all this, the form of the recession and its duration, is very uncertain. And it depends on a great unknown: the course of the virus.

In a recent report, McKinsey consultants and economists at Oxford Economics presented nine different economic scenarios. In one of the most promising results, in which the virus is successfully controlled and economic restrictions are lifted after two or three months, economic activity falls 8% in the first half of the year, but then recovers at its pre-pandemic level at the end of 2020.

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However, if the virus is not contained within the second quarter and social distancing measures continue through the summer, McKinsey hopes that it may take more than two years for GDP to return to its pre-coronavirus level.

“If we are in a situation where a third of the workforce cannot go to work during the summer, you will see a lot of bankruptcies. You will see many corporate debt defaults "The longer this lasts, the more permanent the damage to companies and individuals will be," said Susan Lund, a McKinsey partner and one of the report's co-authors.

"What depends, first of all, is how fast we can control the virus."

United States Recession

Source: cnnespanol

All news articles on 2020-04-02

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