Is the V-shaped recovery now over?

In recent days, accelerating Covid-19 infection rates in various countries, a couple of policy developments and some high frequency data have combined to suggest that any supposed V-shaped economic recovery is over. It also suggests that the closing three months of 2020 will bring further declines in GDP growth.

Financial markets, already nervous, have shown additional volatility, with clearly increased fears that any hopes for a sustained economic recovery from September onwards may be finished.

I suspect that this pessimistic shift in mood, while entirely understandable and partially justified by the latest evidence, is unlikely to persist. And yet, many other problems will persist and remain unanswered well into the next economic cycle. These include not only the question of the equality of any economic growth, but also how the Covid bills are going to be paid.

Many observers are sceptical about the idea of a V-shaped recovery, and when I raise the possibility. I tend to get a sceptical reaction. I can understand this, and the fact that this crisis carries unique psychological and emotional challenges certainly adds to the complexity of judgement about the state of our economies.

But what has been reasonably clear is that, late in the summer, short term leading economic indicators turned upwards and many of them accelerated through August. Monthly purchasing managers’ indices — PMIs — along with other measures of business confidence, such as the German IFO all indicated a recovery. Just as they dramatically reflected the Covid downturn earlier in the year, their rise suggested — at least until the last couple of weeks of September — a sharp recovery. Many other high frequency data points from many different countries show similar developments.

As for China, the second largest economy in the world, and the place where this pandemic started, the evidence has been especially clear — its GDP collapse and recovery have both shown up in the data. In this regard, unlike many parts of Europe, China’s economic data continues to suggest an accelerating recovery, with their consumers also becoming more active.

From a measured global GDP perspective, it is much more important than what is going on in a number of individual economies such as the UK and Spain. In this regard, China and the US alone probably contributed more than three quarters of all the positive nominal GDP in the world in the last decade, and developments in these two economies are crucial for the rest of us. Many US indicators suggest an accelerating recovery, although perhaps not enough to rescue the electoral fortunes of President Trump.

Britain may suffer despite recoveries going on more elsewhere. This is indeed possible when you consider the compounding effect of Covid-19 and Brexit.

Even so, economies have recovered despite domestic policy. Given the remarkable flip flopping on encouraging people to go back to their offices and then discouraging it, on the strong inducements to eat in restaurants and now the opposite, it would be tough to ascribe any economic recovery to our government. That said, in Britain and elsewhere, the fiscal and monetary support measures have resulted from government decisions and it may be quite likely that policy support is still helping growth.

Certainly, the furlough scheme and the widening of welfare provision appears to have boosted savings rates, which in turn provides support for consumer spending. And among the positive UK indicators, just as our own PMI indicators have risen sharply, so have consumer spending indicators. We also appear to have a buoyant housing market, which historically has been a good leading indicator of other positive economic developments. So it does seem that the summer’s economic data should report a very strong positive number also.

The Prime Minister’s September 22^nd implementation of new more restrictive measures lasting for anything up to six months will definitely have negative consequences for business, and also for consumers who are fearful for their own jobs as we approach the end of furlough. But, I interpret the six month messaging differently. Indeed, I suspect it is still possible that a vaccine will come into usage before 2020 is over, both here and elsewhere. If that turns out to be the case, while there will be huge logistical challenges about distribution, it would translate into a massive further increase in optimism amongst consumers, but especially business.

I also anticipate in coming days or at latest weeks, that the Chancellor will announce new measures to limit the consequences of the end of the furlough scheme, this time aimed at trying to reward employment and stimulate productivity.

It remains the case that, once we get a vaccine and the economic recovery strengthens, we may see a mix of: tax increases, spending cuts, inflation and unhealthy bond markets. All of these will threaten the long term sustainability of our economic recovery. But I am not sure the fresh tightening of restrictions this week spells the end of Britain’s hoped-for recovery, and most certainly not around the rest of the world.