What shape would a potential economic recovery take — L, U or V?
There’s an alphabet soup of potential economic recovery shapes.
Some economic analysts think the crisis would be brief and acute (V), others think a more gradual pick up in economic activities (U), and the worst-case scenario of a sharp decline with a slow recovery lasting years (L). The major economic paths could be V-shaped, U-shaped, or L-shaped.
It is common knowledge that measures put in place to control the spread of coronavirus has had an effect on economic activities and could result in major economic contractions — in some cases we have seen it in the data.
Global consulting firm Mckinsey says in “the least worst-case scenario (contained outbreak),” Nigeria’s GDP growth could decline to −3.4 percent this year. The U.S. GDP in the first quarter of 2020 contracted 4.8%, higher than the estimated 3.5%.
However, the major unquantifiable factor is uncertainty. We are not sure how long the crisis would last. We don’t know how people’s behaviours are going to change after the crisis. We don’t know how structural setups are going to change. The best any analyst would do is run scenarios of the possible economic outcomes.
The best-case scenario looks something like this:
Rather than come up with different economic scenarios, on the Daily Market Watch we examined some of the implications.
Have we seen the full effect of the economic decline on companies’ balance sheets yet?
We have not crystallized the losses from what’s just happened, so it’s likely going to be with us through the year. It’s pretty clear in most places including Nigeria that economic activity has to kick start because it’s hard to keep an economy shut down for that long. It could cause a complete breakdown.
The effect that the coronavirus has had on our economy so far is probably going to be worse in the second quarter because we are going to have a full quarter where everybody was basically under lockdown and maybe a few countries easing restrictions. For the most part, this quarter, everyone’s constrained to their homes, and what that means is that in consumer led economies and sectors, people cannot consume and therefore companies cannot make revenue. It’s probably going to be a difficult 2nd quarter for a lot of companies. The sharp decline in the economy would reflect more in the results we get for the 2nd quarter.
However, if the coordinated effort of all the central banks take effect and we see economies reopening en masse, then we could see a rebound from having gone down so low. The third quarter could be better than the second quarter. But it doesn’t also mean we have completely recovered from the effects of this pandemic.
Which sectors could lead the recovery?
Sectors and companies would recover differently during this period. There are some companies that have gone straight up in spite of the economic dip like telecommunications and collaborative tools like Zoom and Slack. However, massive consumer brands who also have distribution locked could have a sharp recovery. You can stay away from companies with heavy debts on their balance sheet.
It turns out that when it comes to markets, knowing the directions and other effects is only one part of the equation. To know how deep the effect is, how big it is and how long it lasts are crucial.
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