Even if recession is avoided, recovery is likely to be U-shaped and uncomfortably long
By Justin Lahart
Photo: WSJ PHOTO ILLUSTRATION/iStockphoto (2)
When a hurricane rolls in, a river breaches its levee or suddenly shifting tectonic plates shake the earth, the economy can experience a big hit. The ensuing recovery is often even bigger.
But the coronavirus epidemic is no hurricane. It will weigh on the U.S. and global economy far longer, it won’t end with a sudden burst of blue skies and it won’t lead to types of rebuilding efforts—there are no roofs to be reshingled—that have historically helped the economy bounce back from natural disasters.
The shape of the economy as it absorbs and eventually recovers from the coronavirus epidemic is more likely to be U-shaped than V-shaped—with a prolonged bottom.
Ever since the scope of the coronavirus epidemic in Wuhan started becoming clearer in January, economists have been cutting their growth forecasts. Early this year, for example, Deutsche Bankforecast that U.S. gross domestic product would grow at a 1.7% annual rate in the first quarter, and 2.2% in the second. Now its economists are looking for GDP growth of 0.6% in the first quarter, followed by a 0.6% contraction in the second.
In the third quarter, they look for growth to resume, but, says Deutsche’s global head of economic research Peter Hooper, “there is no question there will be an overall loss of consumption and investment activity that does not come back.”
Like most of his peers, Mr. Hooper believes the U.S. will skirt a recession. That is by no means a given, though. The risk of a downturn is very real.
Even without taking into account the effects of full-scale spread of the virus in the U.S., it isn’t difficult to imagine a scenario where as people avoid things such as travel and dining out to reduce risk, businesses cut back on employment, leading to an adverse feedback loop that further hurts spending. Nor is it hard to imagine that small and midsize businesses forced to temporarily halt operations will get pushed to failure.
There are two major ways the epidemic will affect the economy: through disruptions to the supply of goods from China and elsewhere, and through the measures adopted in the U.S. to curtail the virus’s spread. There is plenty of uncertainty on both counts.
China’s economy has taken a severe hit from the aggressive measures its leaders imposed to curtail the virus’s spread. Data such as daily coal consumption and passenger traffic remain far below year-earlier levels and, while there has been some pickup in business as many provinces and municipalities have relaxed restrictions, the country is struggling to get back to work. That has disrupted global supply chains, and the U.S. economy is getting hurt as a result.
The good news is that China’s actions appear to have worked, or at least slowed the speed of the spread, laying the groundwork for an eventual recovery in activity. One key question: Will the lifting of quarantines and other restrictions lead to fresh outbreaks in China? That could make the resumption of Chinese manufacturing uneven.
Moreover, the spread of the virus to other countries making goods the U.S. depends upon, such as South Korea, is only making supply-chain problems worse. Shortages of key manufacturing components as well as finished goods could be a persistent problem for American businesses, sapping the strength of any recovery.
The other big way the virus will affect the economy is through how people respond to its threat. Already, people are canceling travel plans and avoiding gatherings. How bad the economic damage gets will ultimately depend on how far such social-distancing measures extend and what types of measures state and local governments might adopt to stem coronavirus’s spread.
But it is hard to gauge the scope of such measures as epidemiologists are struggling to understand some basic facts about the virus, such as how fatal and transmissible it is, The underlying problem is that nobody knows how many people have actually been infected, says Caroline Buckee, an epidemiologist at the Harvard T.H. Chan School of Public Health. “We don’t know how many people have no symptoms at all, or who have minor symptoms.”
It could be a while before that information is available. Meanwhile, Americans may only become increasingly cautious, placing spending at further risk.
And absent a vaccine—something that, if it comes, realistically won’t be available for quite some time—signs that the epidemic are starting to be contained probably won’t lead to people, businesses and authorities to abruptly lower their guards. Rather, they will continue to engage in many of the cautious behaviors that helped arrest the virus’s spread. Scattered outbreaks may only reinforce that message.
So there will be no sudden booking of vacations and no immediate resumption of major business conventions.
No V, in other words. The coronavirus epidemic will weaken the economy, and that weakness is likely to last an uncomfortably long time.
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