Our current recession already is the deepest since World War II in many countries. Yet, perhaps because of the huge and rapid policy response both on the fiscal and monetary fronts, it is remarkable how quickly people have become optimistic about the prospects for the global economy.
The consensus among economic forecasters is that the global economy will contract by more than 4% in 2020.
At the same time, forecasters see economic growth rebounding to the tune of 5.1% in 2021.
Investors appear to be similarly sanguine about the path to recovery given that the S&P 500 is now only about 11% off its February peak.
The question, of course, is whether the so-called V-shaped recovery underlying the market rebound is predicated on sound analysis or on wishful thinking.
In attempting to answer that question, I must concede that during my career, I have never been so uncertain about the economic outlook. This is because the path of the global economy almost certainly will parallel the course of the Covid-19 pandemic.
The duration and depth of the recession will be determined primarily by the length and stringency of government-imposed lockdowns, which, in turn, will be driven by infection rates, the availability of testing, hospital capacity and a host of other variables.
While it is difficult to project the trajectory of the pandemic, it seems clear that predictions of a V-shaped recovery are grounded in the view that we will not see a second wave of infections. That assumption betrays a level of optimism that is difficult to justify.
The authors of the Imperial College London study that prompted public officials to lock down their economies projected lockdowns persisting, albeit intermittently, until 2022.
Researchers at Harvard University also predicted more than one wave of infections between now and 2022. If those gloomy prognostications materialise, it is unlikely we will see surging global growth next year.
It would seem, then, that the only way to ensure a V-shaped recovery is to prevent a second wave of infections and to do so in a way that does not require the global economy to remain in a state of suspended animation.
Slowing the spread of the coronavirus other than through lockdowns is possible but not easy. One solution is to increase our investment in public health infrastructure such that we can increase testing and implement more widespread contact tracing and quarantining of the sick.
Some countries, namely South Korea, Taiwan and New Zealand, significantly slowed the transmission of the coronavirus through these public health measures.
Unfortunately, most countries, including and especially the US, have not been able to test, trace and quarantine to the extent necessary to significantly slow the spread of the virus. Left with no other option, they resorted to lockdowns, which have helped contain the virus but at considerable cost.