Investors holding on to a V-shaped recovery may have been heartened by the recent stock market rebound, but the shortest bear-to-bull market in history looks increasingly like a false start with more pain to come. It is becoming increasingly evident that economic data, not virus data, will be the key determinant of the shape of the recovery.
Just as a patient coming out of a lengthy coma needs a long time to fully recover their faculties, the induced economic coma of indeterminate duration in many countries may cause lasting economic damage even after the coronavirus begins to subside.
Overnight, U.S. initial jobless claims for the prior week jumped to 6.6 million, nearly double the survey expectation and more than double the prior week’s reading of 3.3 million. With a labour force of 165 million, the U.S. unemployment rate has effectively increased by 6 per cent in two weeks – with worse likely to come. The 10 million total reflects only the beginning of the lockdowns, as companies large and small try to keep as many employees on their books as they can afford. If lockdowns continue beyond two or four or more weeks (as they look likely to), companies with minimal or zero revenue will be forced to lay off even more workers. This kind of situation does not look like a precursor to a V-shaped recovery.
Will stimulus make a difference?
What about the wave of global stimulus that governments around the world have unleashed in the wake of COVID-19? These may help alleviate pressure on businesses and consumers in the immediate future, but if the clampdown on economic activity continues, much more stimulus may be required. Most small businesses don’t have the liquidity to survive months without revenue, and in order for there to be a V-shaped recovery, businesses need to not only survive the trough but also emerge in a strong enough position to immediately start rehiring workers en masse. Consumers and businesses are likely to emerge from this recession more indebted than when they entered, which will be a drag on consumption, investment and workforce expansion.
Even if virus data starts or continues to improve, we don’t yet know what this means for the relaxation of lockdowns that are in place. China provides the most advanced (timeline-wise) snapshot of how the virus and lockdowns could unfold, but Western authorities are increasingly questioning the veracity of the CCP’s virus and economic data.
South Korea offers another positive example, but the country took drastically different measures for containment and tracing compared to the Western countries and it is too late for us to follow those footsteps. Italy’s case growth has been moderating and the country’s lockdown is set to expire at Easter, so it will be the test case for the extent to which lockdowns can be lifted and economic activity resumed after a mass outbreak.
Lifting a lockdown and relaxing social distancing rules prematurely can be disastrous if it leads to a second wave of outbreaks and the reinstatement of strict containment measures. For what it’s worth, Wuhan is still under lockdown (until April 8) despite China’s confirmed cases being flat for over a month. Looking around, there appears to be little concrete evidence that a V-shaped global recovery is the most likely outcome to this pandemic.