Why a V-shaped Economic Recovery is Fantasy, not Reality

The International Monetary Fund forecasts a V-shaped recovery of the global economy after the COVID shutdown. It predicts 5.8% world GDP growth in 2021, following a 3.0% decline in 2020.  The U.S. economy is projected to grow by 4.7% in 2020, following a 5.9% decline in 2020. Furthermore, it anticipates growth in major euro zone countries to exceed 4.0% in 2021.  The problem is that level of growth is more than twice the rate in 2019, before the pandemic!

Most analysts who subscribe to a V-shaped recovery argue the lock-down, caused pent-up consumer demand that will be unleashed. The surge in buying will quickly restore economic conditions to the per-pandemic state. Unfortunately, that is emotionally driven wishful thinking. The reality is closer to Wells Fargo’s forecast. It predicts 3.3% world GDP growth in 2021, euro-zone growth at 2.2%, and U.S. GDP, 1.2%. That is a depressing scenario for the V-shaped believers. But it is closer to the truth.

U.S. unemployment bottomed in April and May. The only factor that will prevent it from hitting 25% in June’s unemployment report (which would match the Great Depression’s worst level) is that some unemployed workers will drop out of the labor market and not be counted.

Many workers have drizzled back to their previous jobs – mainly to find very anemic buying. It seems that pent-up demand is being displayed mostly at beachfront and vacation spots, where weary householders have flocked to shake off cabin fever. However, when they return to their ordinary residence, they are still deterred from normal economic behavior by the fear of COVID-19.

Economic data indicates a gradual recovery is occurring, but the process is painfully slow. Last week (May 20th), new unemployment claims declined to 2.44 million from 2.69 million the previous week, and 3.04 million the week before that. That is progress – but it is still ten times higher than the average weekly claims one year ago.

Sure, the stock market is steamrolling ahead. But anymore, it is impossible to judge the real economy by the performance of stocks. This is because the Federal Reserve has pumped trillions of dollars into circulation to support the financial and corporate sectors. The Fed has purchased troubled corporate bonds, kept financial markets liquid, and allowed investors and banks to borrow at near zero percent interest.  Why shouldn’t the stock market do well under those circumstances? The de facto role of the Federal Reserve under the Trump Administration has become first rescue the stock market, then worry about stabilizing the rest of the economy.

If the White House and Fed’s priorities were different, we might have a better chance at a V-shaped recovery. Small businesses (with 1 to 100 employees) should have gotten the same support that large corporations, financial institutions, and larger small businesses received. Secondly, there should have been better and longer-term support for unemployed and displaced workers.  Next, Congress should fully compensate state and local governments who are battling at the front line against COVID-19. Trump should also allocate critical resources across states fairly – without regard to political considerations.

Most importantly, the White House should be leading the fight against COVID from the front and not at the back. It should have led the battle for testing, tracing, and isolating, rather than abdicating responsibilities to states.  Likewise, it should be coordinating the global search for a vaccine, instead of de-funding the World Health Organization.   

About Thomas_Danny_Boston 28 Articles
Danny Boston is an economist, writer, and entrepreneur. He is professor emeritus of Economics and International Affairs at Georgia Tech and for 25 years served as CEO of EuQuant, an economic research company. Today, Danny publishes the blog GazelleIndex.