By: Urvi Siddhapura, SVKM’s Pravin Gandhi College of Law, Mumbai University

INTRODUCTION –

The global economy has been adversely affected due to the outbreak of Covid-19. The world is now in a recession period which may last for more than 1 year. Recession, according to Encarta World English Dictionary is a period, shorter than depression, during which there is a decline in economic trade and prosperity[1]. NBER i.e. National Bureau of Economic Research defines recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales[2]. In order to contain the spread of the virus, the governments of many nations worldwide implemented either partial or complete lockdowns. The lockdowns resulted in closing of businesses which affected the GDP, unemployment level, purchasing power, etc. and slowed down the global economic growth.

The NBER affirms that the USA, which is one of the leading global economy, has now fallen into recession for the first time after the 2008-09 financial crisis[3]. The average global lockdown can be said to have begun in late March 2020 to early April 2020 halting the market forces and producing unemployment. There also loomed the fear of uncertain future which also steered the GDP down further. The 2019 global growth was forecasted to be at 3.2% and the 2020 at 3.5%[4] by the International Monetary Funds which now has been projected -4.9% in 2020[5].

The top 10 countries which contribute to more than half of the global GDP took a serious hit. These countries include USA, China, Japan, Germany, UK, France, India, Italy Brazil and Canada (in the order from most to least)[6]. USA’s GDP shrunk by -4.8% in the first quarter which is said to worsen quarterly percentage decline since the Great Recession (2008-09)[7]. China, too, has been gravely affected by the pandemic as its first quarter shrunk by -6.8%[8]. Other countries too had the same result as their GDP growth tumbled down in the first quarter of this year. This resulted in an overall global economic recession much steeper than the previous ones.

Before the pandemic, the global unemployment level stood at 5.4% in 2019 and was projected to remain the same till 2021-2022 according to The World Employment and Social Outlook Trends 2020[9]. After the pandemic, the rate  probably increased and generated a low capita income per head which further decreased the GDP.

ROAD MAP TO RECOVERY –

Nonetheless, recession only a part of economic cycle, so there always will be a period of recovery and growth. The key to having a swift recovery would ideally be effective control over the spread of the virus with creation of vaccine and/or a cure to the virus is essentially important to curb the economic recession. Then only will the market reopen and allow movement of market forces. This movement would encourage monetary transaction and increase employment in the economy which would be reflected on the GDP as a positive curve. If the above conditions are attained, then the recession should last till 2021-22 if not, then the current scenario might prevail for a longer period of time. But looking at the positive growth of China in the second quarter (3.2%)[10], gives an affirmation to possibility of a swifter economic recovery. The recovery can be predicted by analyzing the four economic recovery curves and the possibility of them occurring. The four curves are – ‘V’, ‘U’, ‘W’ and ‘L’ shaped curves.

The V shaped curve – It can be described as a sharp decline followed by a sharp rise in the economic activity. Refer to the picture given below-    

                                             

The picture shows the recovery curve from the recession of 1953. The GDP fell swiftly and rose again to a greater extent creating the shape ‘V’.

The possibility of a ‘V’ curve recovery is less likely to happen. In order for it to be a swift rise, there is a necessary condition of opening the market all at once and expecting the consumer to respond the same as before the pandemic started which is not likely to happen. Even if the markets are open ,the fear of getting affected would still remain so the demand would not increase.

The ‘U’ shaped graph – In this type of recovery, the GDP sees a sharp fall accompanied by a short stagnation period and a healthy rise. The Jobless Recovery 1990-1991 can be seen as an example for ‘U’ shaped recovery.

The possibility of a ‘U’ shaped curve recovery can be expected to be the best case scenario for this pandemic. The ‘U’ shaped recovery expects the markets to reopen slowly and respond to the consumer demands accordingly. For the pandemic, the aforementioned condition would allow the economy to open in a sustainable manner and also would project a healthy growth period.

The ‘W’ shaped graph – It is also known as the Double-Dip recovery curve as the fall and rise of the GDP occurs twice creating a ‘W’ shape

The possibility of a ‘W’ shaped recovery curve is likely to happen if the countries allow their markets to open prematurely. The premature reopen coupled with little significance to safety measures can lead to a forced shut-down due to spread of the virus. Therefore, the countries have to be extremely cautious while reopening their markets to avoid re-shutting down as this would not only affect the GDP further but also lose confidence of the consumer and lead to a state of panic among the citizens.

The ‘L’ shaped graph – The last curve is the ‘L’ shaped curve. In this curve, the economy experiences sharp decline with very slow recovery process. In other words, it’s a recovery curve that should be avoided at all cost. The ‘Lost Decade’ or Japan recession of 1900s is a prime example of this curve. Japan was at the peak of economic boom when the market crashed and plundered the economic growth which took a decade to recover from.

The possibility of the ‘L’ shaped recovery curve is not too high although it might happen if the situation gets out of control. Nevertheless, all countries whether developed, developing or under-developed would surely like to avoid the painstaking recovery of the ‘L’ curve and hence they’d make policies and pump money in the economy to reduce the chances of that happening. A specific country might experience an ‘L’ shaped recovery but it very less likely that the global economy would experience the same.

COMPARING 2008-09 RECESSION AND COVID-19 RECESSION –

In the most recent times, example of experiencing a recession would certainly be “The Great Recession of 2008-2009.”The cause of the recession of 2008-09 was bust of the housing market, which started with bankruptcy of New Century Financial, who provided subprime mortgages. A couple of months later another major mortgage lender, American Home Mortgage Investment Corp, collapsed[14]. This certainly caused major disruption in the economy of America and it also affected other developed nations banking and housing sector. Compared to the 2008-09 crisis, where the major cause of recession was the inability of the market to meet the demand and supply forces, the recession we are experiencing in 2020 is due to the pandemic of Covid-19 which only halts the demand and supply forces until the market re-opens. Another difference to be noted is that the 2008-09 recession majorly affected the developed countries while the Covid-19 recession affects GDP’s of all countries around the world. The recovery of both cases is also different as 2008-09 recession’s recovery was directly linked to economic activities whereas the Covid-19 recession’s recovery depends on production of antibodies and/or vaccine. There, certainly, have been severe pandemics like the 1918 Influenza and Swine flu of 2009 which to some extent affected the economies of various countries. But both these pandemics were not the central cause of recession, as the recession in 1918 was a by-product of World War I and the Swine flu pandemic occurred amidst the 2008-09 recession. Hence, it can be said that pandemic as the only cause of recession has not been witnessed before. This dawns a realization that Covid-19 recession is one of its kind.

THE FLAW OF GLOBALIZATION AND WAY AHEAD –

The pandemic has highlighted a fundamental flaw of globalization which is outsourcing manufacturing to other countries for cost efficiency. The overreliance on China for production of essential as well commercial commodities and/or few parts of that commodity fired back completely during this pandemic. Hence, it can be seen as a learning experience to at least produce necessity goods in one’s own country for sufficient supply if any emergencies like this occurs.

In order to revive the economy, it is significant to stop the virus from spreading further. And therefore, efficient testing for corona as well as isolation of patients is of utmost importance. If the Covid-19 curve flattens, then partial reopening can be implemented which will positively affect the economy. Fiscal policies to pump money into the economy, policies benefiting the unemployed as well policies to control inflation in the market would play a significant role in bringing back the economy on its feet. Ex. India’s Stimulus package introduced on 12^th May 2020[15] and US’ CARES Act introduced on 27^th March 2020 to provide relief to small businesses, tax implications etc.[16]

Other than governmental policies, vaccine would also play a significant role in curbing the spread as well as increasing the consumer demand. This, of course, would take time to implement as the vaccine would have to be produced and shipped; hence it is up to the countries and their citizens to do all in their capabilities to stop the virus from spreading further. The recovery phase and the curve depends on the aforementioned conditions to be met by all the countries collectively. Only through this process can we expect the ‘U’ shaped curve recovery. The ‘W’ and ‘L’ shaped recovery are less likely and should be avoided as they would affect the recovery phase to extend unnecessarily. As mentioned before the ‘V’ shaped curve in my opinion is not to be expected as there is no certainty that the reopening of markets would receive a positive response from the consumer and might even lead the markets to close down again encouraging a ‘W’ shaped recovery instead.

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[1]Encarta World English Dictionary, https://encarta.msn.com/encnet/features/dictionary/DictionaryResults.aspx?refid=1861699686

[2] National Bureau of Economic Research, https://www.nber.org/cycles/jan08bcdc_memo.html

[3] David Rodeck , Alphabet Soup: Understanding the Shape of Covid-19 Recession, Forbes, 15 Jul 2020, https://www.forbes.com/advisor/investing/covid-19-coronavirus-recession-shape/

[4] Tentative Stabilization, Sluggish Recover; World Economic Outlook, International Monetary Fund, Jan 2020, https://www.imf.org/en/Publications/WEO/Issues/2020/01/20/weo-update-january2020

[5] The Great Lockdown, World Economic Outlook, International Monetary Fund, Apr 2020, https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020

[6] Kimberly Amadeo, GDP by country as measured by three methods, The Balance, 28 May 2020, https://www.thebalance.com/gdp-by-country-3-ways-to-compare-3306012

[7] Ben Casselman, Worst Economy in a Decade What’s Next? ‘Worst in our Life’, New York Times, 30 Jun 2020, https://www.nytimes.com/2020/04/29/business/economy/us-gdp.html

[8] Shalini Nagarajan, China’s economy suffered its first contraction in over 40 years, shrinking 7% in an ‘extraordinary shock’ to the global economy, Business Insider, 17 Apr 2020, https://www.businessinsider.in/policy/economy/news/chinas-economy-suffered-its-first-contraction-in-over-40-years-shrinking-7-in-an-extraordinary-shock-to-the-global-economy/articleshow/75199372.cms

[9] World Employment and Social Outlook Trends, International Labour Organisation, Jan 2020, https://www.ilo.org/global/research/global-reports/weso/2020/WCMS_734455/lang–en/index.htm

[10] Li Xuamin and Chu Daye , China very likely to achieve 2-3 percent GDP growth for 2020: economists, Global Times China, 17 Jul 2020, https://www.globaltimes.cn/content/1194727.shtml

[11] https://www.investopedia.com/terms/v/v-shaped-recovery.asp

[12] https://www.forbes.com/sites/sarahhansen/2020/06/03/u-shape-v-shape-recovery-shapes-explained-and-what-they-mean-for-americas-economy/#50e0cb5f25a5

[13]  https://www.investopedia.com/terms/l/l-shaped-recession.asp

[14] Great Recession, History.com, 11 Oct 2019, https://www.history.com/topics/21st-century/recession#:~:text=The%20Great%20Recession%20was%20a,their%20jobs%20and%20their%20homes.

[15] India’s Rs 20 lakh crore Covid relief package one among the largest in the world, PTI, Economic Times, 15 May 2020, https://economictimes.indiatimes.com/news/economy/finance/latest-stimulus-package-among-largest-in-the-world/articleshow/75701976.cms

[16] US Policy Response to Coronavirus Aid, Relief, and Economic (CARES) Act, Deloitte.com, https://www2.deloitte.com/us/en/pages/about-deloitte/articles/us-policy-response-covid-19-cares-act-family-first-appropriations-stimulus.html