More than one-third of Trustnet readers expect the recovery to be ‘W-shaped’, while more fund managers are starting to think that the bounce-back will not be as smooth as once hoped. 
Since the coronavirus crisis took hold in early 2020, prompting stock market volatility and a huge economic contraction in addition to the pandemic’s terrible human cost, there has been much discussion over what ‘shape’ the eventual recovery will look it.
Initially, many were confident of a V-shaped recovery. This is the ‘normal’ shape for a recession, where an economy has a sharp but brief decline with a clearly defined trough followed by a strong recovery.
Over the past couple of weeks, Trustnet has been polling its readers to see what kind of recession and recovery they think the world is going through, following months of lockdown and uncertainty over the future.
What shape will the coronavirus recovery look like?
Source: Poll of 1,091 Trustnet readers
Only 20 per cent of more than 1,000 professional and private investors surveyed think that we are in for a classic V-shaped recession. This means it is seen as the third most-likely outcome.
The biggest proportion – 36 per cent of readers – are expecting a W-shaped recession, which one commentator below described as “dreaded”. This is often called a double-dip recession and is when an economy emerges from recession only to fall into another one shortly after.
In second place is a U-shaped recession, which tend to be longer than a V-shaped recession with GDP declining for several quarters and only slowly recovering. This expected by 23 per cent of Trustnet readers.
Some 12 per cent think we are heading for an L-shaped recession. This is a prolonged period of weakness, also known as a depression, and the most severe of the various recession shapes.
Opinions over the ultimate shape of the recession are split in the investment management industry as well, although recent months have seen the market rise as if the recovery will be an easy one.
FE Analytics shows that the MSCI World has gained 24.41 per cent since the 23 March trough of the coronavirus sell-off, with most parts of the stock market rallying hard.
Luca Paolini, chief strategist at Pictet Asset Management, cautioned that a V-shaped recovery looks far from being certain, despite what the stock market appears to be telling us.
“As lockdowns are lifted and economies start to revive almost everywhere, it would be easy to assume risk assets were vindicated in rallying sharply since their late-March lows. But we think it is premature to argue that the crisis is over and that the world is heading into a V-shaped recovery. Which is why we maintain our neutral stance on the major asset classes,” he explained.
“Risks are balanced. For all the optimism generated by falling infection and death rates in much of the world and enthusiasm for fiscal and monetary stimulus, the possibility of a significant second wave of the Covid pandemic later in the year can’t be discounted. At the same time, businesses face carrying heavy new burdens – such as having to restructure the way they operate to meet social distancing guidelines – for some time.”
Performance of indices since 23 March 2020
Source: FE Analytics
Schroders was originally forecasting a V-shaped recovery for the global economy but now thinks that the challenges in lifting the coronavirus lockdown has made a U-shape more likely.
The firm thinks the global economy will contract by 5.4 per cent in 2020, a significant downgrade from its previous forecast of a 2.9 per cent fall. This downgrade is largely down from weaker activity in the US and China, the world’s two largest economies.
In 2021, it expects the economy to grow by 5.3 per cent – assuming a coronavirus vaccine is successfully developed and fiscal and monetary policy remain loose.
Keith Wade, chief economist and strategist at Schroders, said: “On a global basis, activity in the second quarter is likely to be as bad if not more severe than in the first quarter, as the lockdowns extended through April and into May.
“However, some of the data suggests we are past the worst: for example, industrial metals prices have stabilised and Google mobility data suggests that activity in the workplace is picking up, albeit from a low level.
“From here we should see activity improve as lockdowns eased toward the end of May and have been loosened further in June. As a result, Q3 should see something of a bounce in activity, albeit to a lesser extent than we had previously anticipated; we think the economy will fail to regain all the ground lost in the first half of the year.”
Legal & General Investment Management (LGIM) sees three potential outcomes for the global economy, which are summarised in the below graphic, and all three would look like a ‘V’ in their early stages.
LGIM’s global economic impact scenarios
Source: Legal & General Investment Management
Tim Drayson, head of economics at LGIM, said: “We now have more visibility on the depth of the crisis: many economies are clearly heading for record-breaking, double-digit drops in GDP in the second quarter. High frequency data in April and early May were truly dreadful.
“We also know that lockdowns have helped bring the infection under control, so economies are now gradually reopening. This means growth will probably be strong in the third quarter as we venture out of our homes; it will look like a ‘V’ at first in most scenarios, in our view. But the level of activity is likely to be far from normal, probably recapturing only about 50 per cent of the drop.”
Which of the three scenarios occurs depends on the speed at which economies reopen and whether there is a second coronavirus wave. While opening quickly could create a big bounce in GDP, it would also increase the risk of a second wave.
Drayson said it is possible that the global economy could start off with scenario 1’s strong, partial rebound but end up with scenario 2’s recovery with some scarring if restrictions have to be re-imposed (“more a square root-shaped recovery”).
A large second wave and return to full lockdowns could result in scenario 3, or the “dreaded” W-shaped recovery, according to Drayson.
“It looks like most governments will be relatively cautious,” the economist added.
“If, as seems likely, social distancing persists through the rest of this year, we should end up somewhere between scenarios 1 and 2 by year end, in our view. For 2021, there is still a broad variety of possibilities, with the availability and timing of a vaccine and treatment being very important.”
Trustnet’s poll of readers had an ‘other shape’ recovery option but only 9 per cent think a recovery will not look like a V, W, U or L. However, these readers are in the company of M&G Optimal Income manager Richard Woolnough.
Woolnough believes that the coronavirus recession is very different to anything the global economy has endured before and could be t-shaped.
“Post-recession growth will return to normal, but initially will be unlikely to regain its previous levels,” the bond manager said.
“This makes this type of recession t-shaped: a sharp pull-down, a sharp rebound and then back to the normal economic cycle, at probably a lower level than before unless the policy response overwhelms the downdraft, in which case we return to where we were before (T, not t).”