DUBAI: Over the past few months, economists who would normally be poring over charts and graphs have been studying individual letters of the alphabet.
Will it be a V, they ask, or a U, or maybe a W?
In a bad scenario, some said, it could be an L shape, where the economy flatlines. Middle East economists got into an argument by declaring that some cursive Arabic script was more appropriate.
This is not a debate about orthography, but rather concerning the most vital question about the global economy: What shape will recovery take? The answer will determine the how we live our lives in the “new normality” of the post-pandemic world.
The global economy has been in a coma since March, following the lockdowns that virtually every country in the world imposed on travel, work, consumption and social interaction.
By some calculations, economic activity has dropped more than 30 percent for the best part of two months.
The World Bank said in a recent report: “The pandemic represents the largest economic shock the world economy has witnessed in decades, causing a collapse in global activity. This would be the deepest global recession since World War II, and almost three times as steep as the 2009 global recession.”
Now, the global economy is slowly awakening from its slumber. Cars are on the roads again and a small number of planes are flying.
In some countries, economic production is approaching February levels. Shopping malls are reopening and people are spending money in shops and restaurants again.
This recovery in economic activity is slowly spreading westwards from China, which was the first to fall into hibernation, and the first to wake.
The World Bank forecasts China’s gross domestic product (GDP) will be 1 percent up overall this year — way down on previous levels of growth but a credible outcome in the circumstances. Next year, a big recovery of nearly 7 percent is expected.
The wake-up call has tentatively reached Europe, where badly hit countries like Italy and Spain are easing restrictions. Continental GDP is expected to fall a huge 9.1 percent this year, but will recover to 4.5 percent growth in 2021.
In the Middle East, where infections and deaths have generally been at a lower level than the rest of the world but which has been hit by the downturn in global trade and the falling oil price, the World Bank is expecting a recovery to 2.3 percent growth from a big decline of 4.2 percent this year.
Saudi Arabia will resume growth at a level of 2.5 percent in 2020.
The US is the big conundrum. The world’s biggest economy got the virus late, but got it bad, with some of the highest death rates in the world.
If the US economy is late coming out of the downturn, or falls back into recession in a second wave, that is a big problem for all of us.
Ian Bremmer, political and economic risk expert, said: “In the USA, all 50 states are now in various stages of reopening, and not one has yet experienced case increases significant enough that there is a change of trajectory in reopening.”
He warned, however, of potentially big economic stresses to come as the US gears up for the presidential election in November, amid increasing social unrest.
The overall shape of recovery will probably be determined by the rate of startup in key individual economic sectors, and is likely to be uneven.
In the airline sector, one of the big drivers of the globalized pre-pandemic economy, the signs are still pretty gloomy. Very few planes are in the skies (except in the US, where domestic flights continued at comparatively high levels throughout) and airlines are hesitant on when they can resume anything near a normal service level.
Dubai’s Emirates, one of the biggest international carriers, said recently it did not expect any significant recovery until 2023.
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The global industry is expected to lose $83 billion in 2020, the International Air Transport Association estimated recently.
Road traffic, another key indicator of economic activity, is patchy. Some Chinese cities are reported to be virtually back to normal, with rush-hour congestion in Beijing and Shanghai once again a feature of Chinese life.
Americans got back on the roads for a recent public holiday, with motorists filling up at gas stations for the first time in months leading to an upturn in fuel usage. But big car cities like New York and Los Angeles still report eerily empty streets. Europe is witnessing a patchy but appreciable return in road traffic.
The other critical gauge of economic activity, the oil market, has pulled back significantly from the chaos of April, as Saudi Arabia and Russia agreed to continue the biggest cuts to supply in oil history.
Prices in May enjoyed their biggest proportionate increase ever, back above the $40 per barrel.
Global demand for oil is still way down, and will continue to be for the rest of 2020, but at least the supply side of the equation is heading towards some balance.
The consensus of oil price forecasts is around $35 per barrel average this year, possibly rising above $50 in 2021.
One cause for comfort so far in the three-month global economic collapse has been the fact that financial markets have not experienced the same downturn.
After an initial slump in stock markets in March, the indices have recovered almost to pre-pandemic levels as governments pumped money into the financial sector to head off another, more damaging crash.
The outlook on a whole range of other economic activities — from container shipping figures to footfall in malls through to global hotel occupancy — tells the same story: Current savage recession, immediate future improvement, outlook uncertain.
But there are big imponderables that could hit the global economy hard once more. Has the full pandemic story emerged in big economic blocks like South Asia, Africa and Latin America?
What will be the economic effect of a second wave of virus infection, or a mutation that confounds the slow progress towards a vaccine?
The World Bank report describes three possible outcomes. On the “upside scenario,” pandemic controls are largely lifted by the end of this month and “all major economies splutter back to life in the third quarter”. That is the V shape the economists talk about.
In the “downside” scenario, “measures that had previously begun to ease are quickly and aggressively re-introduced,” over the summer as infections accelerate in a relaxation of social-distancing rules.
In this case “persistent and severe financial market turmoil would cause a notable spike in bankruptcies worldwide and trigger serious bouts of financial distress in many emerging markets.” That is the W, or even the L, shape that the experts fear.
But there is so much uncertainty about global economic prospects that the economists will probably have to invent a new letter for the alphabet.