Think Big: V-shape, U-shape or L-shape? This economist is bullish about a quick US rebound
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Having hit the US economy for six over the last two months, the impact of the COVID-19 health crisis over the next 12 months is now a subject of increased conjecture.
Broadly, debate centres around what shape the recovery will take; a V-shape (quick bounce), U-shape (staggered recovery) or L-shape (extended recession).
For Michael Knox — chief economist at broking and wealth management firm Morgans — the June quarter is likely to be historically bad.
But looking ahead, Knox suggests investors should form their view with a 2021 rebound in mind.
In a podcast earlier this month, Knox compared the response effort to the current health crisis with the 1918 flu pandemic (which is estimated to have infected 500 million people globally).
Citing research from the New York Federal Reserve, Knox said for US states that implemented stricter quarantine measures early on, the benefit was twofold; lower mortality rates, and a faster economic rebound.
“What that tells us is, based on this knowledge then right now we’re doing a really good job — particularly in Australia,” Knox said.
By the Easter break, Australia was tracking with a COVID-19 mortality rate of 1.65 per million people, compared to 33.2 per million people for the US.
But it was the world’s largest economy that was the focus of Knox’s discussion, where he highlighted the latest Blue Chip consensus data — a monthly set of forecasts compiled by leading private-sector economists.
For the June quarter, investors should hold onto their hats, with US companies expected to feel the brunt of the lockdown’s impact on economic activity.
After that though, the economists surveyed expect to see a V-shaped or U-shaped recovery, rather than extended contraction.
The forecasts indicate annual US economic growth should finish Q2 “around 7 per cent lower than it began”, Knox said. That will mark the biggest fall “since the national accounts started being calculated in 1948”.
However, output is expected to stabilise as soon as Q3 “and then begin a very rapid recovery”, Knox said.
So after a steep fall in output, “then begins a major boom for the following two years, as people go back to work in the US economy and growth accelerates”.
Knox said the economists surveyed expect the rebound to result in annualised economic growth in excess of 6 per cent in 2021. And Morgans took a bullish stance with respect to the flow-on effect for stocks, where the direction of prices typically leads moves in the real economy.
“Obviously enormous growth in the US will generate rapid growth in stocks over the same period. And as a matter of fact we expect stocks to lead growth,” Knox said.
So while the June quarter will get ugly, Morgans remains of the view that the economic impact of the health crisis will be sharp, but relatively short.
“We think the US will have a large drop this year, followed by a dramatic acceleration of over 6 per cent in 2021,” Knox said.
“It’s tough right now, but by the time we get into the second half of the year we’ll start to see a recovery, and in 2021 especially both the US and Australian economies will be growing at boom levels.”