If Economic Recovery Is a Letter of the Alphabet, Which Will It Be?

5 min read • Nov 10, 2020 • Grant Olsen

Did you ever use a Magic 8-Ball when you were a kid? You’d ask a question, give it a shake, and then wait for the answer to float up slowly to the viewing window. Through the murky liquid in the ball, you’d see mysterious responses to your yes/no question, like “It is certain,” “Without a doubt,” “Most likely,” “Signs point to yes,” “Don’t count on it,” “My sources say no,” or “Reply hazy, try again.”

If you were to ask a Magic 8-Ball when post-pandemic life will return to normal for your business, you’d likely get the response “Reply hazy, try again.” There’s simply too much unknown right now to think about exactly when a vaccine will become available and how that will impact consumer behavior.

A recovery is certainly on the way—but it’s safe to say we know little about the details.

“Not all recessions are created equally,” explains a financial report from Bankrate. “Neither are the recoveries—and the biggest financial fear is that the current economic slump will persist years after the coronavirus is contained. Economists often say recessions take on shapes. A ‘W’-shaped recession is a double-dipping downturn, with the financial system bouncing back but falling again. A ‘U’ form means lower-for-longer, while a ‘V’ means a sharp decline but an equally strong snapback.”

In case you’re unfamiliar with the various letter shapes of financial recoveries, we should all be hoping for a “V.” The good folks from Experian have put together a report that forecasts the various routes our recovery could take. Some of the possibilities are encouraging, while others provide plenty of reason for concern.

How exactly do you forecast the economy when it’s so volatile? Accounting for the most recent economic trends and developments, Experian’s research also considers the economic recoveries of the past. It may seem like we’re living in unprecedented times, but most of what’s happening in the world has happened before in various iterations.

Some of the crucial characteristics considered for each scenario include:

  • How much time it will take to rein in the virus
  • The level at which government measures are followed
  • The scale of resurgences when restrictions are eased
  • The impact of trade and supply chain disruption
  • The health of financial markets
  • The current credit conditions

The researchers set the stage by laying out the grim conditions that defined Q2 for America’s businesses:

“According to the US Bureau of Economic Analysis, GDP in the second quarter of 2020 contracted by 31.4% SAAR (seasonally adjusted annual rate), a historic record, with most of the decline concentrated in April,” states their analysis. “Thereafter, the economy recorded a gradual improvement, underlined by an easing in the restriction measures. Government support measures helped households and businesses deal with immediate financial constraints, which propped consumer confidence and business sentiment. Unemployment spiked in April and led to a notable drop in the labor force.”

From the bitter lows of April, most factors inevitably improved—there has to be a rock bottom somewhere, after all. As consumer confidence trended upward, so did optimism among small business owners. The expiration of stimulus measures from the CARES Act, however, is having a profound impact on most businesses, and the once-promising prospect of another round of economy-boosting measures has dimmed.

At the state and local levels, governments are strained by lower revenues and higher expenditures. In some cases, states are unable—or unwilling—to contribute to the support measures intended to buoy their residents. Layoffs and furloughs are happening among the ranks of state employees, highlighting the fact that no business is immune from the pandemic’s harsh effects.

Enough of the bad news—let’s talk about recovery. More specifically, let’s look at what Experian’s research reveals about the 4 most likely trajectories that our impending recovery will take.

The V-Shaped Recovery

Here’s what we should all be hoping for. The forecast for this scenario is that COVID-19 is controlled effectively and the strictest public measures are relaxed. A much-anticipated round of government stimulus support brings positive results, and confidence blooms all around. Most encouragingly, the GDP gets back to pre-pandemic levels in 2021.

The Delayed V-Shaped Recovery

In this scenario, there’s no follow-up to the CARES Act. We see COVID-19 cases rise around the country. Amidst the resurgence of the virus, strict containment measures are reintroduced that impact consumer behavior and damage business optimism. On a positive note, credit conditions are fairly strong for entrepreneurs. But the GDP won’t get back to pre-pandemic levels until 2022.

The U-Shaped Recovery

This scenario sees our nation struggling to shake off the negative impact of the Q2 lockdown and other containment measures. Winter brings a sustained wave of new COVID-19 cases, and the follow-up to the CARES Act is too little, too late. As positive cases rise, strict confinement measures also reappear. Consumer activity is severely impacted by household budget constraints and the resulting trepidation. Recovery is slower here as the GDP fails to hit pre-pandemic levels until 2023—and there’s even the possibility that it will take until 2024.

The W-Shaped Recovery

As with the U-shaped recovery, COVID-19 cases rise through the winter in this scenario. Confinement measures return, and the economic growth of Q3 is throttled back by a decline in consumer confidence and a rise in unemployment and financial strain. The credit supply for businesses shrinks, which compounds the issues. Unemployment proves to be a long-term problem, and the GDP doesn’t get back to pre-pandemic levels until 2025.

While none of us know exactly how the recovery will play out, these 4 scenarios are far from the random predictions displayed by a Magic 8-Ball. It’s almost certain that we’ll follow one of the routes outlined in this report—the details will vary, but the trajectory and major milestones will be consistent.

The next 2 months will be crucial as our future plays out. If we’re able to control the number of COVID-19 cases and avoid stumbling back after the gains of Q3, the outlook for 2021 improves substantially.

Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.