The global economy will need at least five years to recover from the coronavirus pandemic. This is the prediction of Kenneth Rogoff, who with fellow Harvard economist Carmen Reinhart wrote in 2009 one of the definitive accounts of financial crises, This Time Is Different.
In an interview published today, both economists have disputed the notion that the coronavirus will cause a V-shaped recession. Along with a growing number of other economists, they’re predicting a deep U-shaped depression.
And with it, the stock market will continue to falter along uncertainly for several years to come.
Speaking to Bloomberg, former IMF chief economist Kenneth Rogoff answered the question of what the coronavirus recovery will really look like. Ominously, even his best-case scenario is a nightmare.
So there are going to be phenomenal frictions coming out of this wave of bankruptcies, defaults. It’s probably going to be, at best, a U-shaped recovery. And I don’t know how long it’s going to take us to get back to the 2019 per capita GDP.
Capping off, Rogoff added that “five years would seem like a good outcome out of this.” Put differently, the best we can expect from the coronavirus is five years of reduced economic activity.
His co-author Carmen Reinhart voiced a similar opinion. In her view, a W-shaped, double-dip coronavirus recession is also possible.
That’s a very real possibility given past pandemics and if there’s no vaccine. One thing that’s clear is that the numbers are going to look spectacularly great in some months simply because you’re coming out from a base that was pretty devastated.
Backing up her predictions, Reinhart argues the picture is particularly bad for service economies such as the U.S. Because of the enduring threat of coronavirus contagion, services will suffer for many more months, if not years.
How do we know which retailers are going to come back? Which restaurants are going to come back? When the crisis began to morph from a medical problem into a financial crisis, then it was clear we were going to have more hysteresis, longer-lived effects.
Reinhart and Rogoff write in This Time Is Different that the 2008 crisis wasn’t actually different. However, they both affirm in today’s interview that the coronavirus recession really is different. And much like them, other economists are increasingly predicting a long-term, years-long depression.
Last week, Bridgewater Associate’s Ray Dalio predicted that the economy’s return to its previous trajectory could take “three, four, or five years.”
Towards the end of April, MUFG’s managing director and chief financial economist Chris Rupkey wrote a note about the coronavirus depression:
At this point it would take a miracle to keep this recession from turning into the Great Depression II. It is going to take years not months to put these pandemic jobless workers back to work at the shops and malls and factories and restaurants across the country.
In sum, such forecasts paint a very negative picture for the stock market. Currently, the Dow Jones has been stuttering for over a month, ever since making a partial recovery from March’s lows.
Given the above forecasts, the stock market will continue to fumble along for several years.
It may see some short-lived and modest boosts from incremental steps in easing lockdowns. However, the underlying economic base will remain depressed, so there won’t be much for the Dow Jones or S&P 500 to get really excited about.
In other words, the Dow Jones won’t trouble 30,000 again for a long time to come.