Anticipating the Shape of the COVID-19 Recession and Projected Recovery

  • 13 April 2020

Lately, much has been publicly debated regarding the shape of our current recession and the projected recovery thereafter. No one foresaw how the global economy could be impacted so fast and vast by an (economic) infectious disease, literally.

Thus, we are all speculating, as no one has ever experienced this phenomenon before. As tax leaders and their executive colleagues continue to plan response scenarios for during and after the pandemic, it can be helpful to keep in mind the ABCs of recessions and recoveries—or, in this case, the UVLs. Even so, the current facts and variables may actually reveal an additional letter to the economist’s forecasting alphabet, one that is symbolic of this unforeseeable event. More on that later.

Understanding the Global Landscape

Although looking ahead can bolster effective planning and organisational resiliency, this holds true so long as that sight is focused on the right target. Leaders need to understand the global landscape since complex systems, such as economies, are often unpredictable and can produce such events as bubbles and collapses. Right now, for example, it is too early to forecast with a certain degree of accuracy what specific fiscal policy adjustments or solutions (e.g., sales tax rate increases) federal, state and local governments will use to sustain economic stability after this current recession takes a deeper hold.

It is also premature for governments to begin planning and making those decisions. Although we lack an exact model, or historical replica of this global calamity, evidence of past downturns shows us that when fiscal retrenchment, or fiscal policy responses, start too early in a recessionary cycle, it can actually compound the depth and duration of the recession, and perhaps worsen its spillover effect. Consequently, managing and configuring each phase of the crisis—from stabilisation to recovery and eventual growth—is paramount.

That’s why experienced and innovative strategic planners are now probing the likely complexity and intensity of this recession that has inevitably materialised in the wake of this global economic collapse caused by COVID-19. One way economists differentiate among recessions and their recoveries is by the trajectories that economic activity traces on graphs and past models during the contraction (and immediately afterwards).

Recession & Recovery Shapes

Here are three main recession and recovery shapes labelled for the letters that their economic trend lines look like on an economist’s chart:

V-shaped Recessions

We’re currently hearing a lot about the likelihood of a V-shaped recession and recovery sequence, though more so from elected officials than economists at this point.

In this instance, after a dramatic decline in growth, GDP quickly bottoms out and is followed by a similarly swift recovery within a short time. (We should keep in mind that generally, an average recession can last up to 13+ months.) This V-shaped scenario is an optimistic one, although only slightly possible, given the extraordinary “supply-shock” conditions leading to this large-scale, waterfall-like global distress. My research to date suggests it may also be an improbable one at the moment, given the many factors and variables involved. This model presumes that the global economy will rebuild itself quickly once COVID-19’s spread is contained and the means and mechanics of exchange, as well as business activity, return to normal.

From what I have seen thus far, relatively few economists believe this scenario is likely because it underestimates the massive economic impact the pandemic already has caused, as well as the potential impact of a number of foreseeable or wildcard incidents, such as another calamitous hurricane season in the autumn, earthquakes or vast forest fires in the west, wars, terrorist attacks, etc. But more unpredictable still, is human behaviour. We know that humans don’t always behave rationally, often leading to judgement errors, biases and preconceptions that can prevent sensible decision making. Therefore, a second COVID-19 wave, or rebound, is probable should we miscalculate the business activity timing and eradication of the disease.

U-shaped Recessions

U-shaped recessions take longer to reach a nadir and then linger there before a slower recovery takes hold.

This scenario is more probable than a V-shaped recession because it accounts for the cyclical distress the pandemic caused, as well as the longer period of time that probably will be needed to recover from the global economic crisis.

L-shaped Recessions

This is the rarest and most severe type of downturn, and one in which a sudden decline in economic activity is followed by a nadir that lasts for an extended period of time.

The W-shaped Recession

My own hypothesis, like a V-shaped recession, this “double-dip” downturn strikes quickly. Once that decline in economic activity bottoms out, it increases for a period of weeks or months before declining again. After that second decline reaches its lowest point, a more robust recovery occurs pretty quickly.

Global Tax Resources Related to COVID-19

For more information on how this healthcare crisis is impacting businesses, we have compiled a list of resources that provide the latest tax implications at the international, U.S. federal and state levels.

Learn More

Current Analysis

Consequently, this current analysis supports a W-shaped recession. Although the waterfall-like decline was swift, it occurred because the global economy was purposely halted. Now, we should not expect the instantaneous recovery of fragmented markets, the restoration of the labour force at full capacity, etc. Hence, in this scenario, the W waves considers those lags, delays and adjustments, however brief, that generally occur in the aftermath of any economic shock. The W model is more fluid and realistic because it also considers that this particular economic cycle is very delicate, thus causing movement up or down. It also accounts for the human factor described above, as well as the containment and eradication of the virus globally. The question: How high or low will the middle "hump" (W) get and how long can it last?

A W-shaped recession poses unique risks for business, investors and consumers, who often adjust their labour, spending and investment decisions too early in the recessionary cycle, before the “real” economic recovery takes hold. Of course, business leaders who recognise and plan for those types of trend lines and rugged landscapes, are better positioned to help their companies sidestep the potential risks.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc..

Explore more resources from our industry influencers:

View Newsletter Signup