Economists around the world have begun to try to forecast the effects of the spread of COVID-19. A European Union leader was unambiguous about the outcome. Commissioner Thierry Breton told local media, according to Reuters: “Before the crisis we were (expecting) around 1.4% (economic) growth for the whole continent, now we expect a negative impact of between 2% and 2.5%.” While the jury is still out on the United States and China, the chance of two consecutive quarters of negative gross domestic product worldwide has spiked.
Several models forecast the effects on the U.S. economy. Two are part of the classic analyses of economists. One is that the recovery will be V-shaped, with a sharp dip into negative GDP, followed by a rapid recovery. The V-shaped movement takes only a quarter before the turn back upward. A U-shaped recovery means a true recession. GDP goes negative and lasts for three quarters or longer. The spread and duration of the severity of the coronavirus are likely to tell which of the two it will be.
China’s 7% plus growth over most of the past two decades begs the question of whether a true recession is there. Two consecutive quarters of negative GDP may not be a fair measure. Two that are up less than 3% is probably a more reasonable measure. In the current quarter, a near shuttering of most of the manufacturing economy and tremendous damage to consumer activity mean GDP could dip below zero. Some parts of the nation’s business activity have restarted. However, no one knows if there will be overseas demand for the yield from its factories.
New measures that have closed restaurants and bars, combined with the drop in demand for transportation, may be the tip of the iceberg in the United States. Next would come the closure of retail outlets and fast-food establishments, among the largest employers in the country.
V-shaped or U-shaped recovery? The answer is only weeks away.
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