The long road to economic recovery post-coronavirus

Due to the coronavirus epidemic, we are at a time when both state and global economies are negatively impacted. As the leading economies of the world are at the top of the list of the hardest hit states by Covid-19, forecasts and expectations regarding global economic growth are not looking very good.

In the first quarter of 2020, China experienced an economic contraction of 6.8 percent, and this record shrinkage was seen for the first time since 1992, that is, after 28 years of consecutive growth. The Chinese economy contracted by 9.8 percent in the first quarter compared to the last quarter of the previous year. In this situation, the IMF estimates that the Chinese economy will grow at 1.2 percent in 2020. The pre-coronavirus economic growth forecast for 2020 was 6 percent.

Naturally, we will have seen low growth rates in the U.S., the U.K., Italy, and several other countries, which are now hotspots of the epidemic. In addition, there will be those that experience negative growth in the first quarter, as well as countries that will contract in the second quarter. Although the estimates for the third quarter are optimistic, the Covid-19 vaccine has not yet been developed and the possibility of the epidemic reemerging come autumn brings along uncertainties regarding the 3rd and 4th quarters.

There are different scenarios regarding the extent of the effects of a pandemic on economies all directly tied to the uncertainty and prospects changing the economic conjuncture, and most importantly, when economic growth will be jump-started again, i.e. how recovery will take place.

The “V” scenario predicts that the global economy will shrink in the first and second quarters of 2020, and that it will not extend beyond that point with the normalization steps that will begin after the second quarter. In other words, the “V” model predicts rapid recovery after rapid contraction. Compared to these scenario alternatives, it will be the least costly one for the global economy.

The “U” scenario depicts that the damage caused by the contraction in the global economy will last longer and recovery will be slower. In this scenario, it is predicted that the contraction experienced due to the outbreak in the first and second quarters will recur in other quarters. Therefore, the likelihood of a low and arduous economic recovery reinforces the forecast that 2020 will be a lost year.

The “W” scenario states that, following the contraction in the economy in the first two quarters, the impact of the epidemic will wane and the global economy will enter a recovery process as new normalization steps begin. However, if the outbreak is likely to reoccur and the vaccine is late, especially in the fourth quarter, a second dip will cause economies to shrink again as in the first two quarters, meaning that economies will experience a "double dip." Therefore, it indicates that there will be a turbulent process like the letter “W” in economies.

The “L” scenario is the worst by far. It is a scenario created based on the assumption that growth in economies sharply declines and does not occur for a long time. However, we can dismiss this scenario as unlikely due to the fact that some normalization has already started and will continue after the epidemic.

Although the epidemic is still ongoing, we can predict that with normalization already starting in some countries, other attempts to reopen economies will follow and slow economic recovery will start. However, despite the economic normalization steps to be taken, and due to numerous serious uncertainties such as consumption, investment, export, tourism and the restrictions between countries, matters such as the time-frame and the ways in which the economies will recover have not yet crystallized.

Most importantly, bringing the outbreak under control does not necessarily mean that this pandemic is over. Therefore, one should not expect the new normalization period to resemble the pre-corona period.