Australia to face V, L or U-shaped recovery?

A stark dilemma is hovering around in economists’ mind as they try to forecast what recovery is going to look like- V shape, L shape or U shape-after coronavirus lockdowns. They are tasked with predicting the economic recovery path if there will be a rebound, relapse or slow recovery in the world economy from the worst contraction since 2009 induced by COVID-19.

V-shaped recoveries start with a steep fall with an equivalent rebound later. A U-shaped recovery is when the economy takes more than 2 quarters to recover after a contraction reflecting that the lockdown’s impact will not immediately disappear once they are lifted. An L-shaped recovery occurs when growth falls but does not recover for some time. For this, global COVID-19 cases have to persistently rise, which will push the need for extended lockdowns.

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As per WTO Global Trade Model, in an optimistic V-shaped recovery with a duration of 3 months, global GDP is projected to fall by 5% in 2020 putting it in a negative growth trajectory of -2.5% for 2020 relative to 2019 due to coronavirus pandemic.

J.P. Morgan states, “If the length and extent of recoveries are equal to the recession, then the loss of output will be fully retrieved during the time of rebound whereas asset markets might improve as swiftly as they plunged. Hence a V-shaped recovery. However, if recession puts a dent to balance sheets and labour markets over a longer-term, recovery in income would be slow and so will be the rebound in profits and asset prices implying a U shape.”

As per the World Economic Outlook report of IMF, coronavirus pandemic will shrink world output by 3% in 2020. US economy will shrink by 5.9, and the Euro area will shrink by 7.5% during 2020. China is projected to grow at 1.2%.

Source: IMF World Economic Outlook, April 2020

A much larger fraction of the population is likely to see negative per capita income growth in 2020 than the financial crisis of 2009.

Australia in for V shape recovery

Australia is a trade-based economy. A recession in the global economy is likely to hit the country’s economy. The Australian economy is linked to both China and the US and will be hampered until the time the 2 countries persist to be weakening. This recession is not like a normal one that is caused by an asset bubble or oil price hike, but a self-induced recession to save people from a public health crisis.

As per IMF, Australia’s economy is projected to plunge by 6.7% in 2020 with an unemployment rate of 7.6%. However, the economy will grow by 6.1% in 2021.

Tim Toohey, Strategy head for Yarra Capital has forecasted a small case ‘v-shape’ recovery for Australia. The growth comes on the back of lifting up of the demand once restrictions are removed and major trade partners China and South Korea showing signs of relief.

The average growth for the economy is expected to be a negative 5% in calendar 2020, one of the deepest contractions since the Great Depression and post-war period.

He expects the recovery to be at 7% in 2021, which comes at a relative baseline of 2-2.5% growth rate. The prediction was on the back of the fact that coronavirus cases will peak in April though they have occurred slightly earlier and releasing of restrictions gradually. So, recovery will happen once the services sector picks up with people going to cafes, restaurants and sporting events. The limits will bring up remote working, online spending and education into trend changing some of the components of the economy.

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He also added that the debt overload due to the issuance of bonds to support recovery and the savings rate of households and businesses who are in dire need of liquidity would contribute to a low medium-term growth rate.

Even after a cash rate cut, fiscal measures worth $320 billion, unconventional policy actions, decreased capital requirements by banks and a more competitive currency, Treasury has asserted that the unemployment rate is expected to reach 10% in the June quarter 2020.

Australia flattening the curve

With a slower number of cases being reported daily in the country, more economically harmful measures are expected to be avoided with social distancing measures still in place.

COVID-19 disease has infected more than 6440 individuals in the Australian region and 63 deaths have occurred till now, with the everyday surge in new cases dipping to single digit of 9 percent from 25-30 percent noted a week before.

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Professor Jodie McVernon, modelling guide to Federal government on coronavirus, stated,” A vaccine would be needed to completely turn-off the risk of being infected, and even if the rates go down in the coming months, the possibility of a resurgence of virus cannot be ruled out.”

She said that if the restrictions are lifted too early, even a small number of infected people can result in a rapid rise in the cases.

Hence, Australia is still a bit far from achieving immunity from the virus and needs to be cautious in making every decision for the economy.

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