A “V”, “U”, or “Swoosh”

Economists are taking the plunge despite many uncertainties and offering projections on what the future might hold for the U.S. and world economies.

All economists agree the COVID-19 pandemic will cause a record-setting plunge in economic output in the second quarter (April-June). Estimates suggest the U.S. gross domestic product (GDP) could plummet between 9-35 percent. Yet most economists foresee a turnaround in the later part of the year. The question is whether the turnaround will look like a: “V”, rapid downturn, rapid upturn; “U”, rapid downturn, brief period of flat growth, rapid upturn; or the Nike “swoosh”, rapid downturn, slow upturn.

Downturns in the economy of the magnitude being experienced this year are rare. The Economist magazine reports “an analysis of data by the World Bank reveals that since 1960, across rich countries, there have been only 13 instances in which an economy experienced an annual decline in GDP of at least 5%, only three cases in which output fell by at least 7% in one year . . . and none in which output dropped by more than 10%.” These declines centered around the oil crisis in 1973, the Asian financial crisis in the late 1990s, and the financial crisis in 2008-09. Prior to 1960, severe economic setbacks resulted from the Great Depression and two world wars.

The record is mixed on how quickly economies rebound following such setbacks. Some countries have taken multiple years to recover, while others bounced back within a year or two. The Economist notes a few patterns from history worth considering when it comes to economic rebounds. First, the depth, intensity, and duration of the setback influences the length of recovery. Second, the speed at which the restoration of global trading networks occurs is important to the “robustness of the rebound.” Third, it is important to implement the right macroeconomic policy during the crisis to set the stage for recovery. Get these things right and a strong rebound should be in the offing.