V, U, W or L: What shape will the recovery take and when might it happen?

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Personal Investing

24 April 2020

What does it mean when economists’ predictions look like a Scrabble board?

Many had already expected 2020 to feature a recession for select countries but none could have predicted the rapid spread and global impact of the novel coronavirus Covid-19. 

The world now faces an economic crisis unlike anything seen since the Great Depression. Government schemes worth billions, sometimes trillions, have attempted to mitigate the economic shock of this outbreak but the immediate impact of the lockdown on people’s livelihoods and businesses is inescapable.

Arguments vary about the way containment measures should be lifted and how quickly the global economy can get back up to speed. We’ve looked at what different types of economic recovery may look like and how long each might take:

V-shaped recovery

In our view the most positive outcome would be a V-shaped recovery – a scenario in which a steep market fall in 2020’s early months is followed by an immediate bounce back in the second half of the year as businesses and offices are re-opened. Former US Federal Reserve (Fed) Chair Janet Yellen suggested such a recovery might be possible. However, this would necessitate a swift public health solution and the successful application of the support programmes from governments and central banks like the Bank of England and the Fed.

U-shaped recovery

In this scenario, restrictions on movement will be in place for several months to prevent further outbreaks, necessitating the continued closure of non-essential businesses. This means the recovery will take longer to get going. Compared to the 2008 crisis, which caused the global economy to contract by 0.7% that year, the International Monetary Fund now predicts that the effect of Covid-19 could be a whopping 3.0% contraction. However, the fund’s projection also includes a major bounce back for the world economy overall, of 5.8%, for 2021, even as growth in advanced economies such as the UK and US does not get back to the pre-virus peak until at least 2022.

W-shaped recovery

What if the lockdown is lifted too soon? If the measures in place are removed prior to the full control of Covid-19 this could sacrifice the economic recovery. Many fear this will be the outcome if the US lockdown is lifted prematurely. Though easing restrictions will initially boost economic activity in the short term, this could come at the expense of longer-term public health and long-term economic prosperity, with a ‘second wave’ of the virus triggering a second economic downturn – hence the W.         

The Economist Intelligence Unit recently said that a potential second downturn may be caused by a potential debt crisis caused by the greatly increased spending by governments which were already in a precarious financial position.

L-shaped recovery

This is perhaps the path which worries governments the most. In this model, the global economy suffers permanent damage due to the loss of jobs and suspension of business activities resulting from the spread of the virus resulting from a protracted lockdown. As the cost of the support programmes increase, it may be that the ‘recovery’ is to simply maintain the current level of economic activity as a new normal, rather than returning to level seen prior to the outbreak.

So what can investors do?

As always, trying to time the market and invest at the ‘perfect’ moment would take a whole heap of luck and could go wrong for investors’ returns. Instead, a long-term approach that rides out the market ups and downs, or one with regular investments that may help smooth out the turbulence help safeguard your savings and potentially help you achieve your goals.

Remember, the value of your investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested.

 

Source: Views expressed by Legal & General as at 23 April 2020.

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Risk warning

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.

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