What is a W-shaped recession and how can we avoid it?



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  • As policymakers plan their responses to COVID-19, they must be cautious in loosening the restrictions too quickly.
  • Historical data from the 1918 epidemic suggests that ending blockades too quickly could lead to a deadlier second wave.
  • Nor should policymakers abandon economic stimulus measures too quickly.

“Those who cannot remember the past are condemned to repeat it,” George Santayana joked in 1905. It is a phrase that has been repeated for more than a century, but is rarely taken into account. As COVID-19 decimates the global economy, our understanding of history could be the difference between a V- or U-shaped recession and a W-shaped recession, in which the incipient recovery is followed by successive relapses.

As recently as March, V-shaped recoveries in individual economies seemed plausible. Once infections and deaths peaked and began to decline, the logic was that people would eagerly return to work. Economic activity could even receive an additional boost, as consumers released pent-up demand.

This is in line with the pattern of recovery from natural disasters such as earthquakes and hurricanes, as well as the epidemic of severe acute respiratory syndrome in 2003. Although production in China, the epicenter of the outbreak, did suffer as a result of SARS, it it recovered so quickly that annual GDP was barely affected.

Today, China reports that industrial production rebounded in March from its fall in February. But overall, it seems clear that forecasts for a global V-shaped recovery from COVID-19 are overly optimistic.

However, policymakers can design a U-shaped recovery. In such a scenario, certain segments of the economy would reopen, with employees physically separated and, if possible, temporarily (in shifts). This would keep the economy going until the health crisis is under control, at which point all sectors could restart and a full economic recovery could begin.

This scenario would require countries to guarantee frequent free trials on a large scale. That is technically feasible, at least in high-income countries, although governance failures in many, such as the United Kingdom and the United States, have impeded its implementation. If effective antibody tests are developed, and the relationship between antibodies and immunity to COVID-19 is confirmed, a return to economic activity would be achieved. Contact tracing should also be considered, which has helped limit the spread of the virus in parts of Asia, such as Singapore and South Korea.

Of course, a cure or vaccine would be a game changer. But even in the best case scenario, testing and approving any advance could take a year and a half. If economic activity remained severely depressed for so long, the state of the current recession would be confirmed as the worst since the Great Depression of the 1930s.

But there is an even more devastating scenario: a prolonged W-shaped recovery, caused by the inability of political leaders to heed the lessons of history. Two policy errors, echoing the interwar commitments, seem particularly likely.

The first mistake, toward which many leaders, beginning with the President of the United States, Donald Trump, have already shown a dangerous predilection, would be to declare “victory” over the virus prematurely, abandon public health interventions, and allow it to cause a second wave of infections. to hold. That is what happened during the so-called Spanish flu pandemic a century ago. The first wave hit the United States in early 1918. The second wave, in September 1918, was much more deadly. The third wave persisted in 1920.

In 1918, as today, cities instituted social distancing measures, including closing schools, bans on public gatherings, and face mask requirements. But late action was common, and few kept interventions for long. A 2007 study by the National Academy of Sciences found that the success of US cities. USA In reducing the number of deaths, “it was often very limited because interventions were introduced too late and stopped too soon.”

In fact, no one confirmed public health interventions as much as they should. San Francisco reduced mortality by at least 25%, the highest rate among US cities. USA But, instead of reinforcing its commitment to its interventions, this success led the city to cancel its restrictions in November; A second wave of much more deadly infections followed in December and January. If San Francisco had kept its social distancing rules longer, estimates the National Academy of Sciences, it could have reduced the death toll by 95%.

Political leaders could also abandon the economic stimulus too soon, the second mistake that could lead to a W-shaped recession. The events of 1936-37 in the United States show how devastating this decision can be.

In 1936, satisfied with the progress in recovering from the depression that had begun seven years earlier, the administration of President Franklin D. Roosevelt reduced federal spending and increased taxes. At the same time, the United States Federal Reserve tightened monetary policy, doubling bank reserve requirements and sterilizing gold inflows. By 1937, the United States economy had fallen into a severe recession, which lasted until 1938.

US policymakers made a similar mistake after the 2008 global financial crisis. President Barack Obama’s fiscal stimulus program, enacted in February 2009, along with the Federal Reserve’s monetary expansion, halted the free fall of the economy. Recovery began in June of that year. But in 2011, after the Republicans seized control of the United States Congress, the fiscal stimulus ended prematurely, significantly impeding recovery.


There is good reason to be concerned that US policymakers make a similar mistake today. While unprecedented bipartisan monetary and fiscal measures are helping, the work is far from finished. If Trump loses the White House in the November election, but Republicans retain control of the Senate, they can suddenly rediscover the evils of debt and once again demand policies that are effectively pro-cyclical. After all, the debt-to-GDP ratio of the United States will rise above 100% by the end of the fiscal year, according to new CBO forecasts. (It doesn’t help to have entered 2020 already burdened with a $ 1 trillion budget deficit, a reflection of horrible fiscal policy at a cyclical peak.)

Policymakers around the world should remember a simple rule of thumb: To avoid a W-shaped recession, let “W” represent the premature “pullout” of economic stimulus or public health measures. As previous crises have shown, such proposals should be avoided like the plague.

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