When it first became clear that the coronavirus was a global event, it mainly looked like a medical emergency. We would contain the virus, defeat it and move on. There would be a price to pay, but as Boris Johnson said in March, there was “absolutely no reason why economies worldwide should not come roaring back”. This is the economic recovery as a V shape – a sharp drop in stock prices and business activity, springing back to normal afterwards.
Within days we could see that it wouldn’t be so simple. Once the lockdown started, with no obvious endpoint in sight, the economic damage was obviously going to be more severe. Where margins are already tight, businesses would not be able to survive for months with no trade. Companies that expect to be busiest in the first quarter of the year also face an existential threat. Even with government support, the disruption isn’t going to be something businesses can bounce back from. 60% of business leaders are now planning for a U shaped recovery – a prolonged recession before an upturn.
A U shape still assumes that there will be a recovery and a return to previous growth trends. If the recession becomes a depression, we may be looking at something worse again. Global trade networks may break down. The medical crisis could become a food crisis, an energy crisis, a financial crisis. People may find themselves tipped back into poverty. The impact of the coronavirus then looks more like an L shape – a downwards step with no foreseeable return to what we thought was normal.
As the Harvard Business Review describes, all three of these shapes were visible in the financial crisis a decade ago. Canada’s economy famously bounced right back, with banks and banking regulations that were much more resilient than many other advanced economies. Britain and the US got the U, a longer recession and ‘sluggish growth’, as financial journalists insist on calling it. For what the L looks like, a graph of Greece’s GDP gives us a pretty good indicator. The financial crisis was the end of an era.
Like the last crisis, I suspect the coronavirus will carve different divots in different economies. We will probably see all three shapes represented. Some of that will depend on political responses, some of it on economic circumstances. If history is anything to go by, it will get ugly in some places. There will be unrest. Governments may tumble.
What happens where you are will depend on local circumstances. And it’s also important to recognise that a crisis has two components – the trigger and the underlying vulnerability. Countries can build up weaknesses through debt, over-stretched supply lines, investment bubbles, unsustainable resource use or inequality. A variety of things could set that off, such as a natural disaster, a war, or a decisive political reversal such as a coup or the Brexit vote. Last time it was the unravelling of negligent banking practices. As it happens, this time it’s a pandemic. The economy is cyclical and was already due for a downturn, so it will be up to future historians to parse the crisis and decide what was the virus and what was underlying weakness.
I don’t have any predictions for the form the recession will take here in Britain. What I do know is that assumptions about the coronavirus have already moved from V to U. I know that it’s almost impossible for politicians to talk honestly about L because it can become self-fulfilling. But the longer the economy remains closed, the more likely it becomes. Last week a Bank of England economist described the current crisis as “an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.” And I also know that in Britain, there’s a whole farago of Brexit consequences waiting for us at the end of the year.
Whatever form it takes, there are political principles that we can put in place to guide our actions. Katherine Trebeck writes about how we can ‘build back better’ and transition to a wellbeing economy. Green New Deal approaches aim to embed decarbonisation at the heart of the recovery. And 350.org have some good material on what a just recovery looks like, and I’ll come back to their five principles for a just recovery another time.