Is a V-shaped economic recovery still possible?

Given the scale and unprecedented nature of the economic shock from Covid-19, it is not surprising that most commentators see a bleak outlook for recovery.

But key weekly and monthly indicators suggest a sharp return to growth remains more likely.

Jim O'Neill, chairman of the Royal Institute of International Studies, wrote that if the recovery trend does come, we must turn our attention to other issues - such as the quality of future growth.

Since March, I have been more bullish than other commentators on the possibility of a "V-shaped" recovery from the pandemic-induced downturn (though I have also been warning about the structural challenges facing many economies over the next decade). Given the apparent depth and scale of the current crisis, wherever I express this optimism, it will be countered. However, as we head into July, many classic short-term leading and coincident indicators still point to a V-shaped recovery, as does Andy Haldane, chief economist at the Bank of England.

While the COVID-19 pandemic has its own complexities, the weekly and monthly metrics I've long relied on can still effectively separate the signal from the noise. In my early days as chief economist at Goldman Sachs, I helped develop a "Global Leading Indicator" (GLI) index designed to be as accurate as the OECD's long-term index, but faster and better Predict the behavior of financial markets.

Since leaving the financial industry seven years ago, I have been monitoring GLI's public index, which is released monthly. These include the U.S. manufacturing purchasing managers' index (PMI); the ratio of new orders to inventories; weekly jobless claims in the U.S.; a survey of Belgian business confidence; and monthly export data from South Korea. In addition, you can follow well-known PMI surveys in other countries and monthly surveys such as Germany's Ifo business climate index to understand the state of the global economy. Importantly, China has many similar indicators, which are often more reliable than Chinese critics believe.

In addition to these short-term leading and coincident indicators, there are many more indicators related to financial health. From late February to March, when the Covid-19 outbreak spread to South Korea and Italy, financial markets reacted to the widespread perception that "the crisis will reach pandemic proportions." Stocks fell sharply and global financial conditions tightened markedly.

As a result, all of the aforementioned high-frequency indicators collapsed. South Korea’s exports fell sharply in March and April, purchasing managers’ indices (PMIs) collapsed across the board and unemployment soared in many countries, especially the United States, despite major government moves to cushion the blow. Predictably, these trends have been driven by the sudden spread of Covid-19 in developed countries, where infection rates have soared and economies have ground to a halt.

Since then, the outbreak has ravaged emerging and developing economies and much of the United States. The sheer scale of the public health emergency, combined with unprecedented lockdowns across global economies, has added a touch of drama and apocalypse to the crisis. It's no surprise that many will question the optimistic view.

Nonetheless, current high-frequency indicators suggest a V-shaped recovery is still possible. After all, governments around the world have responded to the outbreak with economic policies of sheer scale, intervening through significant monetary and fiscal measures. The response measures taken by many governments have far exceeded the global financial crisis and recession of 2008-2010.

Granted, policymakers are more concerned with containing the current health and economic emergency than stimulus; but many of the most important crisis responses will continue to have lasting effects. For example, in many cases, subsidized furlough schemes implemented to maintain household income during the most critical times have boosted savings rates, which will (where conditions permit) translate into higher future spending. And that's just one of many reasons why financial market indices have risen sharply in recent weeks.

These may not be normal times yet, but, under normal circumstances, such a rapid rebound would mean an economic recovery. In addition, many key high-frequency indicators are improving - some notably. U.S. jobs data for two straight months and monthly PMIs for the U.S., Europe and Asia all rose.

Notably, the Caixin Services PMI rose to 58.4 in June, also a decade high, despite ongoing challenges in China. For those who doubt the veracity of China's data, I need to remind you that this index fell to a low of 26.5 in February. Also, South Korean exports were much stronger than in previous months (though still down 11% from a year earlier).

Clearly, all V-shaped recovery trends are temporary. If major economies are forced to lock down again, key high-frequency indicators and broader financial conditions will undoubtedly deteriorate again. But if lockdowns remain partial and temporary, and if health systems continue to expand testing, especially if a vaccine or more effective treatments are developed, the economic outlook will not be as bleak as many believe.

If a V-shaped recovery does come, then attention must be turned to other issues - such as the quality of future growth. We must not repeat the mistakes of 2009-2010, where the recovery left much to be desired in terms of productivity gains and inclusiveness. Policymakers need to think more imaginatively and radically than they did a decade ago. But this is another topic, and I will write a review article dedicated to it in the future.