Things are bad. You don’t have to be a genius to know that. The million dollar question is when and how will things improve. The coronavirus health crisis has thrown us into the dark tunnel of economic recession and we can sense the light of recovery in the background. The experts do not agree on the true map of the tunnel and, to describe the possible ways to reach the light, They have baptized their different theories with an alphabet soup according to the trajectory drawn by the macroeconomic figures in the graphs: from the desired recovery in V, through the less optimistic U, to the dreaded L, among others.
Begoà Torre Olmo, Professor of Banking and Finance at the University of cantabria and deputy director of Santander Financial Institute (SANFI), from UCEIF Foundation, helps us to unravel it. “All these letters are informal ways of graphically describing economic recessions and their recoveries, considered from the point of view of the evolution of GDP in a given geographic area: a country, a region …”
We start with the most desired. “The V, perhaps the most traditional, represents a clear fall in productive activity, but followed by an equally defined and rapidly consolidating recovery”. Less seductive, “The U-shape means that, after the decline, activity does not pick up as quickly, leading to a longer recession, with stagnation at the bottom of the cycle”, instead of the narrow angle of the V. Finally, “The L is more dangerous. After a severe recession, it takes time to get back to growth, if at all …”
We have a good example of this last possibility in Japan: “It had a really significant growth after the Second World War and until the end of the 80s, but since the end of that decade its economy was immersed in a path of years and years of much slower growth. ” In Spain we still have another letter close by: “The W is probably the one that best defines the 2008 crisis: after the fall there was a rapid acceleration in activity, but underlying systemic problems produced another relapsed in 2011, with its subsequent recovery “.
Beyond the alphabet of possibilities (we are not going to go into the details of the K, the F …), we are interested in knowing which of them is being drawn on the horizon. In favor of the longed-for V, “the great news of the arrival of vaccines is pushing, although it is difficult to catch up and the pandemic situation is still in a very bad time. The economy always discounts future expectations and hopefully a U does not arrive and in a few months we can begin to consolidate a rise “, says Torre, who concludes:” The recent IMF forecasts may incline us towards the latter “.
But to what extent can we decide the stroke of the letter? The key lies in “collaboration and common sense. Economics is a social science, it is not just about numbers. At this time, when health is a priority, citizens have to comply with what the health specialists, doctors and researchers. Lowering the coronavirus figures will allow restrictions to be relaxed and the economy and the most affected sectors to resume their normal activity “.
For its part, “Companies are the ones that invest, and the investment results in employment. The promotion of business investment seems fundamental to me, so all existing mechanisms for incentives in this regard will be welcome. It is important not to let initial liquidity problems turn into solvency problems, a very real risk. ”
The public powers, in turn, “give stability to the system, as well as efficient management, planned on defined and sensible objectives, It is the best way to move forward taking advantage of the opportunities that exist right now, and that are very important. We have never seen a European bet like the current one; European restructuring funds can provide not only an impetus to make the recovery much faster, but are also capable of enabling this transformation of the economy with the sustainability criteria to which we have committed and that are good for current and future generations. “
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