BUSINESS MAVERICK ANALYSIS: The economy, the tyranny of Letters and the shape of things to come

In the middle of June 2020, Goldman Sachs CEO David Solomon predicted a “V-shaped economic recovery”, even though at that point, Covid-19 cases were increasing throughout the US.

It should be noted that a V-shaped recovery is the most optimistic scenario in an economic recession. The underlying idea is that the cause of the recession is a kind of weird anomaly of some sort; perhaps a bubble in house prices. Or, for example, a pandemic which arrives fast and leaves fast. The second reason for optimism was that the policy response by governments and reserve banks around the world has been unprecedentedly aggressive. In contrast to past recessions, reserve banks have taken Thor’s hammer to interest rates, while governments have spent like drunken sailors fresh in port.

Likewise, our most recent global recession in 2009 was for most countries “V-shaped”, and it is somewhat worrying that the speed with which the Covid-19 recession was declared likely to be V-shaped suggests some undue complacency. Some economists say, forget the damn letter analogies entirely. It’s a mug’s game in a situation like the current one where you have a global pandemic; a circumstance which has not happened for over a century.

There is also the W-shape, which is particularly cruel because the economy recovers then lapses again. That could be possible now. But perhaps the most common letter-analogy economists are using in the current recession is the “Nike swoosh” shape, in which there is a quick downturn, followed by a very gradual upturn.

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