McKinsey economists lay out 9 potential coronavirus recession scenarios — ranging from a summer recovery to a 'black swan of black swans'
Uncertainty around the coronavirus outbreak's trajectory remains the biggest obstacle for experts forecasting the US economy's trendline. So, McKinsey partners detailed nine different scenarios for a post-pandemic nation.
Variables including the US's public health response, bankruptcy rates, job loss, and the government's policy response make for a wide range of possibilities, McKinsey said in the March report. Though it's human nature "to freeze, or to jump to a simple answer," the team looked to "bound the uncertainty with reason" and put forth a wide range of futures that will evolve alongside the pandemic.
"Two things are reasonably certain: If we do not stop the virus, many people will die. If our attempts to stop the pandemic severely damage our economies, it is hard to envision how there will not be even more suffering ahead," McKinsey said.
The firm currently expects one of four more optimistic scenarios to take place, with COVID-19's spread controlled and "catastrophic structural economic damage avoided." The outcomes range from sharp V-shaped recoveries to turbulent U-shaped trends, as global output slides to historic lows before activity swiftly returns to past norms.
Yet other, more dire situations can't be ignored, the firm said. A so-called "black swan of black swans" could bring lasting structural damage to the US as the virus rampantly spreads until an efficient vaccine enters the market. A wave of bankruptcies and layoffs would spread economic chaos through the nation, leaving government policy ineffective and suffocating credit lifelines.
These scenarios would result in W- or L-shaped GDP trends, bringing either short-lived bouts of recovery or dooming the US to years of suppressed activity, according to McKinsey.
All nine scenarios are possible, but China's status as the country-of-first-infection could bring clues as to which trends will crop up in other nations, the firm said. Early economic data suggests regular activity is quickly resuming in the nation after weeks of strict quarantine orders and factory shutdowns.
China's economy is positioned to reach its pre-virus output levels by 2021 if outbreaks elsewhere don't interfere with its rebound, the team wrote.
Should Europe and the US follow a similar path, their economic shutdowns would only last a few months before government relief and deferred demand drive a strong summer recovery, McKinsey said. GDP would roar back in a slow U-shaped curve detailed in the firm's A3 scenario.
A less hopeful outcome would yield a staggered recovery, the team added, as China re-institutes lockdowns and demand for its exports remain constrained. The US or Europe would endure a longer outbreak and continue social distancing measures through the summer, pushing an economic bounce-back further into 2021.
It would take more than two years for GDP to return to pre-outbreak levels, McKinsey said, linking the trend to their A1 projection.
Whether the US economy's resurgence matches one of the firm's four more hopeful estimates or takes a bleaker course, containing the virus as soon as possible remains the most important factor, McKinsey wrote.
An uncoordinated effort risks new outbreaks occurring and leaving recovery delayed until an effective vaccine can be developed, tested and produced in record time. Following social distancing mandates and avoiding unnecessary health risks helps better the odds of the public's safety and a smooth economic upswing, the partners said.
"We are not writing to predict that this will happen but rather to issue a call to action: to take the measures needed to stop the spread of the virus and the damage to the economy as quickly as humanly possible," McKinsey wrote.
Jim Hepple is an Assistant Professor at the University of Aruba and is Managing Director of Tourism Analytics.