Is a 'V-Shaped Recovery' Difficult for the Economy in the Second Half? ... Why?

[Image source=Yonhap News]

[Asia Economy Reporter Koh Hyung-kwang] As projections suggest that the spread of the novel coronavirus infection (COVID-19) in advanced countries such as the United States and Europe will peak next month, expectations for a rapid 'V'-shaped economic recovery are emerging. However, despite the slowdown in the increase of confirmed cases, many believe that countries will find it difficult to ease social distancing due to the risk of resurgence, and economic activity recovery in China, where the slowdown in confirmed cases appeared in mid-last month, is lagging behind expectations, leading to opinions that a gradual 'U'-shaped economic recovery may proceed.

On the 12th, Ha Geon-hyeong, a researcher at Shinhan Financial Investment, said, "Considering the social distancing shock that will continue despite the earlier-than-expected slowdown in confirmed cases, the sluggish recovery of employment and economic sentiment despite mitigation of COVID-19 damage, and weakening stimulus momentum, the possibility of a 'V'-shaped rebound in the second half is limited," adding, "Although the growth rate in the third quarter will temporarily recover due to the base effect and pent-up demand inflow, caution is needed against a double-dip contraction in the fourth quarter."

Researcher Ha also diagnosed that the recovery of employment and economic sentiment, which collapsed due to COVID-19 damage, will not occur in a short period, which is a burden. He explained, "Since 1950, the average time it has taken for the unemployment rate to return to previous levels after a U.S. recession is 48 months, with the fastest case being 23 months," and "Consumer sentiment reaches about 70% of the previous peak within six months but takes an average of 40 months to fully recover to previous levels, and in some cases, it does not recover to the previous peak."

He also predicted that stimulus momentum could weaken from the third quarter. Researcher Ha said, "If the financial market stabilizes due to mitigation of COVID-19 damage, adjustment of monetary policy intensity is inevitable because excess liquidity can lead to asset price bubbles," adding, "Moreover, major countries' fiscal stimulus measures, which serve to fill the demand gap caused by social distancing in the second quarter, will enter a policy gap period in the third quarter."

He emphasized the importance of presenting additional stimulus measures to create new demand. Researcher Ha forecasted, "Since private employment recovery occurs with a time lag, income support policies must continue," and "If construction stimulus policies such as infrastructure investment, which directly generate demand and employment in the short term, are also presented, a gradual 'U'-shaped economic recovery is possible."

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