We can will it as much as we like, but history suggests V-shaped recoveries are rare. The deeper the recession, the longer it takes to recover.
There has not been a V-shaped recovery in the US labour market in 40 years. The evidence is the job market takes much longer to recover than gross domestic product.
As lockdowns put in place as a result of the COVID-19 pandemic lift, attention will turn to the speed of normalisation in output and employment around the world.
Some sectors will recover quicker than others, but in aggregate ANZ Research expects demand to fall short of its pre-crisis levels for some time. That could take as long as late 2022 to early 2023.
Many lessons can be taken from similar downturns in the past. In the United States and Europe, on average, it has taken nearly seven quarters for economies to regain their pre-recession levels of output. Unfortunately, it takes labour markets much longer and that holds worrying implications for consumer confidence, household balance sheets and aggregate demand in the short term.
The economic scarring of COVID-19 will only become truly apparent when lockdowns are lifted and economies start to normalise.
Historic evidence signals caution on the pace of recovery in the labour market, inflation and therefore corporate profitability is warranted. Rising bad debts in the banking system seem inevitable which can present a further, structural headwind to recovery.
Speed & scale
The speed and scale at which governments and central banks have provided stabilisation finance in response to the COVID-19 crisis has been impressive. The gigantic monetary, fiscal and credit support is reflected in steeply rising government debt, strong business borrowing and central bank balance sheet growth.
Keeping the supply side of economies intact during lockdown is essential if economies are to bounce back. However, equally important is how long it will take economies to normalise and the potential for changes to firm and consumer behaviour under new social arrangements.
The US and other advanced economies are experiencing the most challenging labour market and deflationary environment since the great depression.
Whilst policymakers are committed to doing whatever it takes to assist recovery, the unknown is how quickly private demand will recover and whether it will recover sufficiently to prevent a debilitating swath of bankruptcies, mortgage foreclosures and a new financial crisis.
The fall in new COVID-19 infection rates in advanced economies is encouraging, allowing a gradual lifting of restrictions. However, we do not know at this stage how long it might take or even whether it is possible to create and mass-produce a vaccine.
In the interim, we do not know how the new normal will affect discretionary spending and investment. For example, will the savings rate shift permanently higher? Will the negative shock to prices prove permanent? What are the implications for productivity?
Profit margins shed some light on the risk to future levels of activity from a prolonged negative shock. Based on a survey of 7,000 firms, the American Enterprise Institute estimates that the average profit margin for the US economy in 2017 was 6.9 per cent ex-financials and 7.9 per cent including financials. Wal-Mart's profit margin was 2.1 per cent.
An erosion of profit margins points to active right-sizing of firms, a rise in business insolvencies and unemployment.
Since 1970, the average US recession has lasted 12 months. The shortest recession was in 2001 and the longest, lasting 18 months, was the global financial crisis (GFC). The current recession is expected to be very deep but short-lived (assuming no second wave of infections), so the length of time it will take for economies to recover their pre-crisis levels is critical.
On average, US GDP has taken 21 months to recover from the onset of a recession to its pre-recession level. The fastest recovery of lost output was from the 2001 recession. The longest was the GFC, which took 14 quarters. In Europe, the recovery from the GFC was also hampered by the sovereign debt crisis.