{"id":26485,"title":"V, W, U or L: What could the economic recovery from coronavirus look like?","link":"https:\/\/bst-europe.eu\/de\/globalization\/v-w-u-or-l-what-could-the-economic-recovery-from-coronavirus-look-like\/","date":"10. April 2020","date_unix":1586521171,"date_modified_unix":1690538729,"date_iso":"2020-04-10T12:19:31+00:00","content":"<p>The Corona crisis continues to affect the\u00a0<strong>global economy<\/strong>. It is now clear that economic output will\u00a0<a href=\"https:\/\/bst-europe.eu\/blogpostsen\/corona-global-economy\/\" target=\"_blank\" aria-label=\"\u00d6ffnet in einem neuen Tab\" >slump sharply<\/a>. But when will a recovery start? Economists think of four basic scenarios.<\/p>\n<h2>The alphabet of economic development<\/h2>\n<p>In the wake of a\u00a0<strong>crisis<\/strong>, the development of a country&#8217;s gross domestic product (GDP) over time can be described using the letters V, W, U, and L (see Figure 1).<\/p>\n<p><a href=\"https:\/\/bst-europe.eu\/wp-content\/uploads\/2020\/04\/post.png\" target=\"_blank\" aria-label=\"\u00d6ffnet in einem neuen Tab\" ><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-26745 size-full\" title=\"economic recovery coronavirus\" src=\"https:\/\/bst-europe.eu\/wp-content\/uploads\/2020\/04\/post.png\" alt=\"economic recovery coronavirus\" width=\"943\" height=\"531\" \/><\/a><\/p>\n<h2>The V-Scenario (best case scenario)<\/h2>\n<p>In this scenario, a sharp drop in GDP is first prevalent. But this drop is quickly offset by an\u00a0<strong>economic upturn<\/strong>. The\u00a0<strong>real economic problems are only temporary<\/strong>:<\/p>\n<ul>\n<li>Companies will reopen after a\u00a0<strong>brief period of closure<\/strong>. The company has contained the coronavirus or created the necessary capacities in the health system to care for the sick.<\/li>\n<li>The\u00a0<strong>social security systems<\/strong>\u00a0can compensate for the temporary\u00a0<strong>loss of income.<\/strong><\/li>\n<li>The decline in employment is only short-term. The subsequent increase in production has a\u00a0<strong>positive effect on employment levels and real wages<\/strong>.<\/li>\n<li>The credit-financed economic stimulus packages cause the\u00a0<strong>national debt<\/strong>\u00a0to rise. However, the following years with stable growth allow a reduction in national debt.<\/li>\n<li>Companies can compensate for their temporary losses, and there is no wave of\u00a0<strong>insolvencies<\/strong>.<\/li>\n<\/ul>\n<p>In this scenario, the global economy emerges from the crisis with a\u00a0<strong>black eye<\/strong>.<\/p>\n<h2>The L-Scenario (worst case scenario)<\/h2>\n<p>The extensive production stop caused by the corona crisis lasts for many months. There is no economic recovery, and GDP remains at a low level. This results in serious economic problems:<\/p>\n<ul>\n<li>Companies that produce nothing\u00a0<strong>can&#8217;t pay wages<\/strong>. The disposable incomes of private households fall. As a result,\u00a0<strong>consumer demand<\/strong>\u00a0is declining.<\/li>\n<li>Even a decline in consumer demand will eventually exceed the supply of goods, if the supply of goods becomes ever smaller without replenishment. The result is rising prices with simultaneous\u00a0<strong>supply bottlenecks<\/strong>. Without a sufficient supply of goods, the\u00a0<strong>inflation rate<\/strong>\u00a0continues to rise.<\/li>\n<li>In the event of a production standstill, companies do not generate any revenues. Many running costs must still be paid. Sooner or later,\u00a0<strong>companies cannot meet their payment obligations<\/strong>\u00a0and have to file for bankruptcy.<\/li>\n<li>Company closures lead to an increase in unemployment. In addition to the associated social upheavals, this also has consequences for the national budget: growing expenditure on transfer payments and extensive &#8211; but unsuccessful &#8211; economic stimulus packages come up against lower government revenues.\u00a0<strong>Public debt is rising rapidly<\/strong>. Sooner or later there is a\u00a0<strong>threat of national bankruptcy<\/strong>.<\/li>\n<\/ul>\n<p>The result of a prolonged production stop is a combination of a\u00a0<strong>supply<\/strong>\u00a0crisis which includes rising prices, a\u00a0<strong>solvency<\/strong>\u00a0crisis with numerous company closures and mass unemployment, and a national debt crisis. Sooner or later this will likely lead to social tensions with a\u00a0<strong>political polarization<\/strong>.<\/p>\n<h2>The W-Scenario<\/h2>\n<p><strong>Phases of economic recovery and setbacks alternate<\/strong>. The slumps may be the result of a renewed increase in the number of people affected, or they may be due to falls in stock market prices or other reasons. An economic downturn such as in the L-Scenario is prevented, but the\u00a0<strong>uncertainty<\/strong>\u00a0of the citizens is great.<\/p>\n<p>Economy and society are in\u00a0<strong>crisis mode for a long time<\/strong>. The economic problems &#8211; declining production and employment, unemployment, supply bottlenecks, increasing indebtedness of states and companies etc. &#8211; flare up again and again.<\/p>\n<p>At some point in time, however, an economic recovery occurs in this scenario and the economic crisis is overcome.<\/p>\n<h2>The U-Scenario<\/h2>\n<p>In this scenario, it takes longer for the economy to recover from the massive slump in growth. Depending on the\u00a0<strong>severity<\/strong>\u00a0and\u00a0<strong>duration<\/strong>\u00a0of the recession, the socio-economic problems will vary in size:<\/p>\n<ul>\n<li>The economic slump is severe and recovery does not begin until after 2021: In this development, the ultimate\u00a0<strong>consequences<\/strong>\u00a0of the L-Scenario are to be feared. Even if there is an economic upturn at some point, the losses in real income and unemployment are high. Public debt has exploded. Many companies are insolvent after a long recession.<\/li>\n<li>The<strong>\u00a0economic slump is huge<\/strong>\u00a0and the economic recovery will start in beginning\/mid 2021: The state uses enormous financial resources to<strong>\u00a0revive the economy<\/strong>. Insolvencies have been prevented by generous liquidity assistance, and state guarantees have taken over bursting corporate loans. The transition to an L-Scenario with all its social upheavals is prevented.<\/li>\n<li>The economic slump is minor and the economic recovery starts in beginning\/mid 2021: This scenario moves towards a V-Scenario. The economic damage is slightly higher than in this best-case scenario, and the same applies to public debt. The economic dent is thus greater than in the V-Scenario, but the damage is manageable.<\/li>\n<li>The economic dip is small, but the economic recovery does not set in until after 2021: The economic damage increases with the duration of the recession.<\/li>\n<\/ul>\n<h2>What can we expect?<\/h2>\n<p>It is\u00a0<strong>still not possible to predict<\/strong>\u00a0which of these four scenarios is most likely for the<strong>\u00a0global economy.<\/strong><\/p>\n<p>After the Lehman bankruptcy in September 2008, most countries experienced a<strong>\u00a0rapid economic recovery<\/strong>. If real GDP in 2007, the last crisis-free year, is set at 100 percent, Figure 2 shows that except Italy, all G7 countries were able to achieve a &#8211; more or less \u2013\u00a0<strong>V-Shaped economic trend<\/strong>. Even in 2019, Italy had not yet reached the pre-crisis level.<\/p>\n<p><a href=\"https:\/\/bst-europe.eu\/wp-content\/uploads\/2020\/04\/Figure2.png\" target=\"_blank\" aria-label=\"\u00d6ffnet in einem neuen Tab\" ><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-26743\" src=\"https:\/\/bst-europe.eu\/wp-content\/uploads\/2020\/04\/Figure2.png\" alt=\"Figure2\" width=\"1430\" height=\"910\" \/><\/a><\/p>\n<p>However, it is uncertain whether this rapid recovery will continue after the corona crisis. At the moment, everything points to the global economy sliding into a\u00a0<strong>deeper recession<\/strong>. This will also make an economic recovery more difficult than after the Lehman bankruptcy.<\/p>\n<p>This massive effort by governments, e.g. in the form of extensive economic<a href=\"https:\/\/www.whitehouse.gov\/briefings-statements\/president-donald-j-trump-providing-economic-relief-american-workers-families-businesses-impacted-coronavirus\/\" target=\"_blank\" aria-label=\"\u00d6ffnet in einem neuen Tab\" >\u00a0stimulus packages in the US<\/a>\u00a0is therefore\u00a0<strong>urgently needed<\/strong>. Perhaps they can cause most countries to achieve an economic development<strong>\u00a0shaped as a V or a short U<\/strong>.<\/p>\n","excerpt":"<p>The Corona crisis continues to affect the\u00a0global economy. It is now clear that economic output will\u00a0slump sharply. But when will [&hellip;]<\/p>\n","thumbnail":"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2020\/04\/glen-carrie-LfviizMGKaE-unsplash.jpg","thumbnailsquare":"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2020\/04\/glen-carrie-LfviizMGKaE-unsplash.jpg","authors":[{"id":312,"name":"Thie\u00df Petersen","link":"https:\/\/bst-europe.eu\/blogger\/dr-thiess-petersen\/"}],"categories":[{"id":152,"name":"Globalization","link":"https:\/\/bst-europe.eu\/category\/globalization\/"}],"tags":[{"id":167,"name":"Coronavirus","link":"https:\/\/bst-europe.eu\/tag\/coronavirus\/"}]}