What Will a Recovery Look Like?

WASHINGTON; April 9, 2020: We’re in the midst of an unprecedented global economic shutdown, the kind of black swan event or exogenous economic shock  we’ve been warned about. 

It happened with frightening speed.  In just six-weeks the US economy went from 50-year low unemployment to 17 million people out of work.  Share prices, at a peak in mid-February, plunged over 20% into a bear market. 

We’re experiencing a global health emergency.  But is it another great recession, or even worse, a prelude to a great depression?

No, there won’t be a depression if sensible policies are in place, and such policies are in place.  As to recession, we’re in it.  After a record 11 years of growth, the economy dove into recession in March.  And no one can say if it will be of long or short duration. 

Growth will be negative in the current April to June quarter. Ben Bernanke, the Fed chairman who steered the economy out of the 2008 financial crisis, says the best that can be hoped for is some kind of recovery beginning in the third quarter. 

That means there won’t be a V-shaped bounce back. The best-case scenario is a U-shaped recovery with growth resuming in the latter part of the year.

For the moment the priority is getting cash into the hands of people whose income and jobs have vanished and making sure businesses don’t go under.  The $2 trillion emergency relief act is aimed at doing just that and more may be needed.

The challenge is huge. Think of it, a million retail workers have been laid off, half a million restaurants are closed, the hospitality industry is devastated, people aren’t traveling causing airlines to ground over 1,000 aircraft, schools are closed. In short, 90% of the American population is staying home. 

closed department store, Chevy Chase, MD

Kristalina Georgieva, head of the International Monetary Fund, says, the world economy has come to a standstill and that the global crisis “is way worse than the 2008.” 

The Federal Reserve and its chairman Jay Powell are being critically pro-active.  On April 9 the Fed announced a $2.3 trillion program to bolster local governments and keep small businesses open.  This comes on top of massive cash injections into financial markets to prevent a credit squeeze and a wave of bankruptcies.  

Sensible Fed policy is a reason the corona recession won’t become a repeat of the great depression.  In the 1930’s the Fed contracted the money supply making credit scarce and more expensive.  Today, as in 2008, it is doing the right thing, flooding the system with liquidity.

The health crisis will have consequences further diminishing the pace of recovery.  Because millions have been working at home via the internet, some percentage of them won’t return to daily commutes to offices. That in turn will impact a wide swath of the economy from gasoline stations, to car sales, to restaurants.  Commercial property prices could contract, hiring will slow. Companies, financially weakened by recession, may not call back all their workers. Salaries and benefits could be cut.

Ordinary people emerging from the current cash squeeze are likely to become cautious consumers. Having discovered the ease of shopping on the internet with goods arriving at their doors, they’re unlikely to make as many trips to the shopping malls. In future they’re likely to spend less and save more.

In sum the corona recession is changing the way we live. When an all clear finally sounds,  all of us are likely to find a new normal of heightened uncertainty, persistent disruption and slower growth.#

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