Now that governments around the world are moving to end lockdown measures and get the economy going again, the question is: what now?
It’s the law of economics that leaving markets to their own devices, they will naturally tend towards growth. Can we expect to return to normal? When will the markets go back to what they were before the pandemic?
A lot of people might be saying that things have changed forever because of COVID-19. And in some policy respects, they might be right.
But this is not the first time the world has had to deal with a major pandemic. It doesn’t even rank in the top 50 most deadly or devastating pandemics.
At the time, the 1918 pandemic was just as scary and momentous (if not more) than our current situation. But the ten years after it are known in history as “the roaring 20s”.
Learning from Experience
Of course, there is a reason we always repeat that past performance does not equal future results.
But, we can look at previous events for some guidelines and understanding as to how we might expect things to evolve. A lot has changed since 1918. But, the markets have also suffered from other pandemics since then, albeit not as severely.
Another coronavirus outbreak in 2003, SARS, came at the tail end of the 2002 recession (the dot.com bubble burst).
Statistically speaking, averaging out the last 100 years, markets have recovered in 14 months following a bear market that wiped out between 20-40% of equity value.
And this is the ballpark of our current downturn. However, those include recessions caused by underlying financial problems, which take longer to process through the economy.
Is a V-shaped Recovery Still Possible?
Recently, Boeing predicted that air traffic will still be at 25% of pre-pandemic levels in September, a sign that many of the more costly economic measures might be here for a long time.
On the other hand, holiday bookings for September are seen at similar levels as prior years. Even Carnival Cruises is seeing increasing demand for late summer.
Clearly, even people with an ear to the ground in terms of discretionary consumer demand aren’t agreeing on how long we can expect a recovery to take. The reality is that recovery is likely to be uneven, given that the impact was uneven.
A recent survey showed that the vast majority of financial institutions were able to quickly shift to remote work, meaning they were less affected.
This is compared to industrial production, especially with migrant labor such as food packing, which suffered more of an impact, even though it was considered an essential work.
What Signs to Look For
The media seems to be focusing on when will people get back to work. But if there isn’t anyone to buy the products that businesses make, returning to work isn’t going to make much of a difference.
The real question probably is something along the lines of when will aggregate demand return? We can measure that with prices, electronic card transactions, and consumer confidence surveys.
The next question is: how much productive capacity has been destroyed?
Industrial production figures, service PMIs, and trade metrics are likely to be crucial this time around. If the economy is growing and people are buying, shipping those products to customers will have to increase. Tracking the average cost of shipping containers might be a good place to start.
