Life After Covid-19 – Scenarios of Economic Recovery

As the cases of Covid-19 begin to level off, many states are cautiously reopening and beginning to loosen their social distancing restrictions in hopes of jumpstarting their economy.

The coronavirus pandemic has devastated the U.S. and world economy, plummeting economic activity and causing soaring unemployment rates. Social distancing policies designed to slow the spread of the disease have resulted in an economic decline that rivals the Great Depression.

So, what can we expect over the next several months? Will the economic recovery be as painful as the coronavirus-linked lockdowns or will there be a bounceback or possibly a scenario in between these extremes?

Currently, economic analysts are debating the following scenarios of recovery:

The “Z-Shaped” Recovery – This most optimistic scenario predicts that the post-pandemic economy bounces back above the pre-pandemic baseline due to pent-up demand, creating a temporary economic boom. In other words, once the risk of the pandemic passes, we will come out in full force, shopping and dining and taking those trips we postponed.

The “V-Shaped” Recovery – The next best recovery scenario suggests that although the economy permanently loses the production that would have occurred absent the pandemic, it will quickly return to its pre-pandemic baseline once social distancing restrictions have been lifted. In other words, the economy will go back to its pre-virus state.

The “W-Shaped” Recovery – This double-dip scenario suggests that there will be a surge in COVID-19 cases after the initial re-openings, causing another round of closures, causing another downturn in the economy prior to a recovery.

The “U-Shaped” Recovery – This scenario suggests that GDP remains low for some time, possibly more than a couple of quarters after the lockdowns have been lifted, resulting in the economy recovering, returning to its baseline slowly.

The “Swoosh-Shaped” Recovery – Borrowed from Nike’s logo, this scenario suggests that after a sharp downturn the economy will gradually bounce back as restrictions are eased and consumers, businesses and state and local governments are willing to spend. Many economists believe this or the U-Shaped recoveries are the likeliest scenarios.

The “L-Shaped” Recovery – This most pessimistic scenario suggests that the pandemic has a permanent affect on GDP, causing growth to continue to decline and not recover for some time. This is pretty much what the Great Depression recovery looked like. Most economists believe this scenario is unlikely unless the number of global coronavirus cases continue to rise, forcing more lockdowns.

The common thread that runs through these various scenarios is that they contain some variation of the tradeoff between the physical health response and economic response. As the economy reopens, measures will still be in place that will curtail economic activity to some degree – businesses will have to space workers and customers further apart, travel will be less common, restaurants will be serving fewer customers at a time, and activities involving large crowds will remain off limits for possibly a long time. Many people will be reluctant to return to life as it was prior to the pandemic, settling into a new “normal.”

Although economists have different recovery theories, they seem to be in agreement that the economy isn’t going to rebound overnight. The key question, however, is whether the damage to our economy will be long lasting.

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