Nike swoosh-like rebound more likely than V-shaped
A Nike swoosh-like recovery is more likely to replace a V-shaped bounce back scenario, Janet Yellen, former Chair of the US Federal Reserve and an adviser to Magellan, told Hamish Douglass, Magellan’s chairman and chief investment officer when discussing the implications of the current COVID-19 health and economic crisis.
According to Yellen, what could happen next would depend on the course of the virus and vaccines and treatments, but she would choose the swoosh rather than a V.
“The thing about the swoosh is that it starts off looking like a V; you have a collapse. And I think we are seeing that. In the US, there was certainly a huge plunge, 5% negative growth in the first quarter. Most forecasters for the second quarter are looking for something in the order of negative 30% to 40% GDP growth at an annual rate. Shocking but probably May was the bottom and we’re seeing quite a few indicators suggesting an impressive recovery,” she said.
“So it’s beginning to look V-shaped. But I opt for the swoosh because I don’t think that’s going to continue. I think we’re going to see solid growth in the second half of the year. But I’m expecting that over the course of the year as a whole, output in the US will decline by something in the 5% to 8% range.”
According to Yellen, before the economy would get back to growth, it would take a number of years and there would be a lot of corporate failure. This was because US companies started this crisis with a lot of debt so they were being forced to take on more so it would be necessary for them to repair their balance sheets.
“There are likely to be significant corporate failures and that points to weak investment and employment heading into the recovery,” Yellen said.
At the same time, she said, if a vaccine were invented and the health risks were to end, the economy could largely go back to normal as the US economy was in good shape in a macroeconomic sense.
“But the health risks are unlikely to end quickly. And if they last a long time, as I expect, there’s going to be a lot of scarring.”
At the same time, Yellen stressed she remained optimistic about progress on vaccines and treatments.
“We’ve got a very inventive scientific community that’s very hard at work. What I hear about vaccine development is very positive. And so conceivably late this year, early next year, we’ll have vaccines that are going into production.
“I’ve been pleased that Congress and the administration have supported a very active role for fiscal policy. I’m worried about what’s going to happen this summer, but I’m optimistic that there will be continued support. We do have an election coming up and I’m hopeful that we will come out of that with a renewed willingness to address some of these problems and a more organised strategy.”
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