No V-Shaped Recovery Ahead

As economies in the developed world open up gradually, the big question remains about how long it will take to get back to the pre-crisis level? 

So far, everything points to a different type of recovery other than a V-shaped one. A recent CBS poll reflects the uncertainty people face and what the new normal will bring. It is unlikely for restaurants to pick up from the same level they were before the crisis, or for airlines to have the same number of passengers. What is most likely, though, is that all such businesses will struggle to survive in the new normal.

According to the Chamber of Commerce, the United States, 40% of US businesses could close permanently in the next six months due to the virus. That would not be a problem except that such businesses employ over 47% of people in the States. Suddenly, approximately 19% of all US workers are at risk of losing their jobs.

Jobs Data in Focus

A V-shaped recovery implies a sudden bounce to economic levels known until the crisis. But if the economic landscape changes drastically, the only way for the economic activity to pick up is for new businesses to replace the old ones.

Take, for instance, the restaurant industry. There is a sharp contrast between the potential layoffs and the hiring by food delivery services. Although the grocery industry hiring is responsible for creating many new jobs, potential restaurant layoffs are in the millions, far outpacing job creation in the sector.

The jobs data on Friday will offer more details. Investors have the chance to dive into the data and see exactly the damage to the American job market. If we judge by the unemployment claims, in the last six weeks, the United States economy lost over five million jobs. Moreover, each week more people apply for unemployment benefits.

Due to the global economic impact of the coronavirus pandemic, what is happening in the United States reflects each country’s economic struggles. Some countries (e.g., Sweden) chose not to close the economy, while some others (e.g., Italy) went into full lockdown. Yet, the economic downturn is the same, reflecting the interdependence of local economies and the role of globalization for economic growth.

Both the Fed and the ECB last week talked about the new normal following the coronavirus crisis. If this new normal is defined by a high unemployment rate, expect sluggish economic growth for many years ahead.

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