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Saturday, June 27, 2020
How will recovery shape up? Post-lockdown economic scenarios: Kemp
By John Kemp
A Kenyan worker harvests flowers which are to be
processed for export. The lockdown caused by Covid-19 has seen slow
business activities in Europe and USA, the key markets for Kenyan
flowers. [File, Standard]
Predicting the shape of recovery after a downturn in the business cycle
is a favourite parlour game for economists and the coronavirus-induced
plunge in business activity has resurrected the usual range of options.
Some forecasters see a fairly rapid and complete recovery once the
lockdowns are lifted (V-shaped) while others see a delayed upturn
(U-shaped) or a stuttering period of recoveries and renewed downturns
(W-shaped).
More ambitious forecasters have raided the semiotic catalogue to propose
recoveries shaped like a check-mark, a square root sign or a Nike
Swoosh.
But the most likely outcome for the economy and the oil market is an
initial fast-but-partial recovery followed by a slower and more
difficult phase.
If that proves to be the case, the expansion will look a lot like the
one after the recession in 2008/09 – which saw rapid growth in late 2009
and early 2010, followed by more disappointing and uneven performance
in 2011/12.
Calling Recession
“During a recession, a significant decline in economic activity spreads
across the economy and can last from a few months to more than a year,”
the US National Bureau of Economic Research (NBER) says.
NBER is a private sector organisation rather than a government agency,
but its business cycle dating committee has become the commonly-accepted
arbiter of the business cycle in the United States.
The committee normally waits until the existence of a peak or trough is
not in doubt and it can assign an accurate peak or trough date.
For this reason, the onset of a recession or recovery is often
announced many months after it occurred, in some cases more than a year
later.
The last recession started in December 2007 but it was not announced for
another 11 months. The last recovery started in June 2009 but was not
announced for 15 months.
In some ways, the recent slump in business activity is much easier to
date. Most indicators show US activity was still expanding in February
but fell sharply in March and even more severely in April.
Coronavirus-induced lockdowns abruptly cut off a mature expansion (128
months) but still looked reasonable underlying in momentum
(https://tmsnrt.rs/3caK1ZY).
February (or possibly March) marked the peak of the expansion as well as
the onset of the contraction on the standard definition. The trickier
question is whether the sudden slump in business activity qualifies as a
recession.
The slump in March/April certainly qualifies as “a significant decline
in economic activity,” the most significant since the 1930s. But the
second part of the definition talks about a decline that “spreads across
the economy” and it is less obvious a description of what happened in
April.
Recessions are transmitted through an economy as a downturn in business
activity, incomes and employment spreads, like an epidemic, from a few
households to a wider section of society.
Recessions are normally characterised by second, third and subsequent
rounds of business closures, income declines and employment losses as
the initial shock is transmitted and amplified.
Like epidemics, recessions are social phenomena, in which the initial
shock (or infection) spreads and accelerates through the links between
firms and households.
Recessions are therefore social processes in which expectations and
narratives play a critical role, which distinguishes them from single or
complex events such as natural disasters (earthquakes) and manmade
catastrophes (war).
But that is not a good description of what happened in March and April
when many businesses were ordered to cease operating as part of
virus-control measures.
If the current downturn does qualify as a recession, rather than
something else, then it is very different from the recession of 2008/09
or any other recession for a hundred years.
Economic distancing
The characterisation of the events of March and April matters because
it will determine what happens next in the business cycle.
If it was simply a pause in business activity, the economy might bounce
back quickly. The downturn is the deepest but shortest on record and
might qualify as a proper recession.
In one extreme example, activities might have peaked in February,
declined in March, reached a trough in April, before starting to rise
again in May as governments relaxed lockdown for business to open.
On the standard definitions, the recession would have started in
February and be over in April, making it just two months long (one
reason why this downturn does not fit the normal recession template).
The economy went into the downturn with unprecedented speed. Perhaps it will emerge with equal rapidity.
Policymakers are hoping for an outcome like this. Finance ministries and
central banks have provided unprecedented support to businesses and
employees in the hope of preventing lingering damage.
Policies have been explicitly designed to put the economy into
hibernation or a low-energy state to protect it from lasting harm while
the epidemic is suppressed, allowing it to be revived quickly
afterwards.
By providing exceptional support, without normal conditionality,
governments try to break social linkages and dependencies through which a
recession propagates. While health authorities are trying to contain
the epidemic through social-distancing, financial institutions focus to
avert a recession through economic distancing.
In this strategy, massive lending and income support is being used to
loosen the normally tight relationship between business turnover and the
state of the economy and between employment and household expenditure.
If the strategy is successful, business could be reactivated quickly in a
few months, which would make this an exceptionally brief downturn.
However, for the economic impact of the lockdowns to be quickly and
completely reversible, there must be minimal second-round effects on
business activity, and few lasting changes in income and spending
patterns.
Governments must be successful in severing the web of
business-employment-income-spending linkages in the economy, and the
post-lockdown economy must look very much like the pre-lockdown one.
In practice, neither of these conditions is likely to be met, which
suggests there could be some significant lingering effects from the
lockdowns even once they are progressively lifted.
The longer the lockdowns last, the greater the risk of second-round
effects on business activity. The more social-distancing required in the
post-lockdown world, the greater the painful structural changes.
Painful change
As lockdowns ease, some effects will be quickly reversed, but others
will be much harder to turn back. Some employees currently on furlough
will return to work, others are likely to find themselves unemployed.
Some businesses will re-open quickly and completely with little change
to turnover. Others will re-open only slowly and incompletely, taking
months or years to rebuild. Some will not re-open at all.
The recovery is likely to be characterised by multiple phases. The first
re-opening phase will see strong and rapid growth as some businesses
reverse the lockdown and reactivate fully or partially, which will
translate into rapid increases in petroleum consumption.
But at the end of first phase, business activity and oil use will still
be well below pre-lockdown levels. Some businesses will run under
capacity and some furloughed workers will be unemployed. This will last
for months. The second rebuilding phase is likely to see slower and
uneven growth.
The second phase will see businesses and households that have been hit
by second-round effects on turnover and employment trying to reconstruct
their position.
Rebuilding is tougher than re-opening, and these businesses and households will need much greater support for a longer period.
Even if the recovery starts quickly, economic activity and oil consumption could remain below pre-epidemic levels until 2022.
— John Kemp is a Reuters market analyst. The views expressed are his own.
Newsdesk@standardmedia.co.ke
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