The world is braced for recession even after governments and central banks have pumped trillions of dollars into their economies and slashed interest rates. Millions of people are out of work, financial markets have been rocked, small businesses have gone belly up and supply chains have faced major disruption as factories around the world have closed. “How bad will it be?” and “How soon will we recover?” are likely the questions that are plaguing businesses and individuals globally.
The measures taken by the Government of Bangladesh and other nations around the world to manage the COVID-19 pandemic—restricting travel, shuttering nonessential businesses and implementing universal social distancing policies—have had severe economic consequences.
As many economies take their first steps towards reopening, there’s been lots of debate on an alphabet soup of recovery paths from V-shaped, L-Shaped to U-shaped. These graphs are a measure of economic performance over time. Economists use the shape of the graph as a shorthand to describe the recovery process after a crisis like a recession, financial crisis or external shock like the coronavirus.
Of course, economists don’t always agree on what the recovery process is likely to look like, and predictions for the outcome of the current crisis run the gamut from a sharp recovery to a slow paced one.
V Shaped Recovery: Steep Decline but Quick Recovery
A V-shaped recession and subsequent economic recovery is all about speed and sharpness. As the below example shows [insert a V-shaped graph here], there can be a sharp contraction in the economy before it experiences an equally sharp recovery to pre-recession levels. This is treated as the best-case scenario for any economy that enters a recession as it quickly recovers without any complications.
‘V’ shaped recovery is the new ‘it’ word after US, President Trump used it in one of his speeches to badly describe the post-covid scenario for the US economy. To quote the president, “We are opening up with a bang and we have been taking about a ‘V’. A ‘V’ is wonderful.”
The President is indeed correct about ‘V’ shaped recovery being ‘wonderful’ since it assumes that all losses that were made would be soon recovered. For the COVID-19 recession to be V-shaped, there needs to be enough coronavirus testing so that people could safely go back to work without creating another surge in cases, and effectively treat existing cases.
U-Shaped Recovery: Long Decline and Slow Recovery
This is similar to a V-shaped recession but lasts longer. In this scenario GDP (Gross Domestic Product) typically shrinks for several quarters in a row, and only crawls back to the level of growth seen before the downturn. In a U-shaped recession, it takes many months, if not years, for the economy to recover. The long, flat stretch of sideways growth comprises the bottom of the U shape.
If COVID-19 causes a longer, U-shaped recovery, that could mean the economy wouldn’t begin recovering until the end of 2020 or even mid 2021. There are a few reasons this could happen. First, if it takes longer to get the surge in coronavirus cases under control, it could delay when a country can begin reopening their economy.
Secondly, if many businesses end up going bankrupt during the period of economic shutdown or are otherwise unable to reopen, there will be fewer jobs thus, creating more economic dislocation. Finally, consumers might not be ready to start spending when things reopen, especially if they are still scared to go out or they do not get enough financial assistance.
L-Shaped Recovery: An Extended Downturn
This is the worst-case scenario. It also goes by another name: “depression”. It is when an economy experiences a deep recession and does not recover to its previous rate of growth for several years, if ever. The official recession may end within a few quarters, but the recovery to a pre-recession level of economic output may take years.
If everything goes wrong in dealing with the COVID-19 crisis, there is the potential for an L-shaped recession. This could happen if we cannot control coronavirus outbreaks, which would result in repetition of shutdowns and sluggish growth, if not outright stagnation.
Can Bangladesh Score A ‘V’?
Edward Lee, Chief economist of Standard Chartered for ASEAN and South Asia, believes there is still a possibility of Bangladesh being one of only two ASEAN and South Asian economies – the other being Vietnam – to register a positive growth in 2020, despite a global recession which is shaping up to be historic in scale.
In fact, a V-shape recovery curve across the world is a possibility as initially governments have taken up unprecedented monetary and fiscal measures to face an unprecedented crisis induced by the Covid-19 pandemic.
But to go back to pre-Covid growth rate would require much more than a large influx of cash. Effective and timely disposal of fiscal commitments, by the government particularly smooth disbursement of fiscal stimulus, will instill confidence in the people. The private sector needs to have their own standard operating procedures to recover from the shocks.
A forward-looking response to COVID-19 is crucial if Bangladesh is to recover quickly from the economic shock and setback of the pandemic. A well designed COVID-19 crisis response should be designed to help Bangladesh look beyond recovery, towards 2030, making choices and managing complexity and uncertainty in four main areas: governance and agency, social protection, green economy, and digital disruption.
But the possibility of a second wave of infection, already seen in a number of countries, remains a concern for Bangladesh and countries around the world.
IMF is still expecting a pick-up in activity toward the end of 2020 and in 2021 for Bangladesh, with growth climbing back to around 6 percent. Of course, that depends on the domestic economy starting to recover. But there is so much uncertainty and it is very difficult to ascertain with precision the recovery’s speed or extent. However with Bangladesh having such strong growth rates before the pandemic, IMF still expects that the country would quickly come back to previous growth rates, if global economic conditions are supportive.