Martina Fuchs: V, U, W or L? China and the alphabet soup of post-virus recovery
Who remembers eating alphabet soups as a child? I loved collecting the letters at the edge of the plate and spelling out words until the soup got cold. Economists are currently busy wading through a different kind of ABC, that of trying to predict the shape of the COVID-19 recovery and whether we can expect a bounceback, a slow-burn improvement, or a relapse. Past economic recessions and recoveries have followed four common shapes: V, U, W and L.
Let’s decipher the conundrum for a minute:
The best-case scenario would be a V-shaped recession, where the global economy goes through a sharp downturn followed by a quick rebound and a minimal long-lasting financial damage.
In a U-shaped recession, the GDP could shrink for several quarters, and only slowly return to trend growth.
A W-shaped recession, also known as a double-dip recession, means a quick recovery followed by a second period of decline.
The L-shaped recession would be the worst-case scenario for the COVID-19 crisis, characterized by a slow rate of recovery with persistent unemployment and stagnant economic growth.
THE NIKE “SWOOSH”
We are far from a consensus.
With the pandemic continuing to spread and virologists still monitoring its trajectory, economists have very little hard numbers at hand to plug into their models. Many now argue that neither L, nor U, V, or W will do. Instead, they predict a “swoosh” recovery, similar to the shape of the Nike logo with a significant drop in output followed by a painfully slow pickup in economic activity.
Forecasts indeed look grim. In April, the International Monetary Fund warned that the global economy is expected to shrink by 3% during 2020 – the steepest downturn since the Great Depression of the 1930s. Even though the IMF projects a partial rebound in 2021 with the world economy growing at a 5.8% rate, the fund said its forecasts were marked by “extreme uncertainty” and that outcomes could be far worse. The World Trade Organization, meanwhile, projected in its latest April outlook a plunge in global trade of between 13% and 32% this year before a likely rebound in 2021. A further escalation in the US-China trade tensions would of course exacerbate the already massive disruptions in global supply chains and cross-border investments.
Martina Fuchs: ALL EYES ON THE MIDDLE KINGDOM
What is for sure is that China holds many keys when it comes to the shape of the global recovery. Economic activity in the world’s second-largest economy is showing some early signs of improvement. Industrial output rebounded in April, new home prices rose at a slightly faster pace, but unemployment worsened and retail sales fell more than expected.
Policymakers are widely expected to announce fresh stimulus measures to spur domestic demand at the Two Sessions starting this Friday. They are the country’s key political event and annual gatherings of the top legislature, the National People’s Congress (NPC), and the political advisory body, the Chinese People’s Political Consultative Conference (CPPCC). Sources even suggest that China may exceptionally drop its annual GDP growth target for 2020 due to the global uncertainties caused by the pandemic.
In the end, the recovery may as well be an aggregate blend of V, U, W and L recoveries. But whatever the shape, the underlying issues have to do with the quest for global supremacy and need to be resolved urgently.
In his speeches and tweets, U.S. President Donald Trump has repeatedly called COVID-19 either a “foreign virus” or a “Chinese virus”. Calls for financial reparations and compensations from China for its handling of the coronavirus are also getting louder.
On the other side, Chinese diplomats are taking retaliatory measures and show an increasingly aggressive stance. Foreign Ministry spokesperson Hua Chunying for example wrote on her Twitter account: “The playbook for blaming China has been exposed. Better stop and take back its systematic and organized attack, slander and defamation of China.”
Diplomatic spats, political blame games and scapegoating won’t help anyone. Indeed, they are incredibly counterproductive. Cases of sinophobia and anti-Chinese verbal and physical attacks are also on the rise in many countries around the world. Wang Huiyao, president of the Center for China and Globalization, a non-government think-tank in Beijing, recently told me: “West and East should really have a dialogue to create a better world leadership.” What we need is more exchange, international cooperation and multilateralism. It would be nice to sit down and enjoy that soup together, whatever the ingredients.