Post-pandemic recoveryThe Economic Recovery Won’t Only Be U-Shaped – It’ll Look Like a Wheelbarrow

By Karl Schmedders, Jung Park, and Robert Earle

Published 10 April 2020

The economic effects of the coronavirus crisis will be severe but short-lived, according to much of the recent commentary. The cautious revival in stock markets points in the same direction, while recent polling suggests that 75 percent of business people share this view. Most of them expect economic activity to rebound this year. We hope that this optimism is correct, but the economic recovery will most likely be long and slow. We are talking U-shaped at best – and probably more like a wheelbarrow than a wok.

The economic effects of the coronavirus crisis will be severe but short-lived, according to much of the recent commentary. The cautious revival in stock markets points in the same direction, while recent polling suggests that 75 percent of business people share this view. Most of them expect economic activity to rebound this year.

The rationale is that the economy before the coronavirus was in great shape. Stock indices were hitting new highs, with the Dow Jones average flirting with 30,000 in early February (it’s now around 22,500). The U.S. unemployment rate was 3.5 percent in February, a level not seen for over 50 years. If the economy is fundamentally sound, the reasoning goes, the worldwide lockdowns are merely hitting a pause button for a short time.

We hope that this optimism is correct, but the economic recovery will most likely be long and slow. We are talking U-shaped at best – and probably more like a wheelbarrow than a wok.

What Lies Ahead
Even with massive government interventions such as the $2 trillion (£1.6 trillion) stimulus package in America, businesses and markets will take longer to recover than people might think. There are likely to be many bankruptcies. Businesses continue to operate during a bankruptcy reorganization, but it severely limits their ability to plan, react to market changes, hire employees, or just have any of the flexibility that is essential to succeed.

The average bankruptcy takes 260 days to work out. During that period, businesses will have a hard time rebuilding. Management will be distracted, while most employees will be thinking about getting more secure employment. And even companies that don’t need bankruptcy protection will need time to rebuild credit facilities, rehire personnel and re-establish customer relationships.

Now consider the complexity of the global supply chain. More than 90 percent of Fortune 1,000 companies have at least one tier-2 (secondary) supplier in Hubei, the Chinese province around Wuhan. Fewer than one in five of these companies have a tier-1 supplier in the region, but one failed link can disrupt the whole chain. The link can be replaced, but it takes time. While this happens, businesses up and down the supply chain have to cool their heels.