V, W, U or L? As the bear market continues, we’re looking ahead at the potential shape of economic recovery – and what each different shape might mean for investors.
V is for velocity
Given the dramatic rises in stock markets in the past month, many investors may be hoping for a “V” shaped recovery. This is a scenario where the disruption will prove to be short lived, lockdown will be lifted within a short space of time, people return to work and the economy starts to get back in gear. In short, business as usual within a short space of time.
W is for waves
If the lockdown ends too soon and there’s another wave of infections, we may see a W recovery. Another lockdown would follow, activity would tail off again and we would only start to recover once the second wave has dampened. So up, then down again, and then hopefully up with the recovery. Not an ideal outcome.
U is for unfolding
If the lockdown is only partially lifted, the letter U might describe the recovery best. How extended the U is will depend on the way in which the lockdown is eased and how gradually it is lifted. For example, certain industries may be allowed to return to normality, say construction. Another approach might be to allow firms of a certain size to start operating first. Whatever the chosen route, economic activity will take some time to reach pre Covid-19 levels. We may only return to what we think of as normal once a vaccine is found, manufactured and given to the general public. Consensus is that is unlikely to happen in the next 12 months.
L is for leaden
Perhaps the worst case scenario is an L shaped recovery. Will some companies and industries just never fully recover? Think of airlines and travel companies, or small businesses like pubs and restaurants where owners don’t have the cash flow and go bankrupt. Then there’s the knock on effect to their suppliers.
Alongside this scenario is the long-term rise in unemployment. And this is where government support becomes important as long as it proves to be effective.
The “health versus wealth” debate is fraught. Putting wealth first too quickly risks a second and third wave of infections and a reversal of the lifting of restrictions. Put health first, and parts of the economy may struggle to regain any sense of normality for a very long time.
The decisions taken in the next couple of months will determine which letter we adopt to describe the way out of the Covid-19 economic episode. It may pay to follow the news quite carefully.
The above article was previously published by Parmenion on 30th April 2020