As we near the end of the year, something unexpected has happened, or not happened to be more specific. The widespread economic meltdown that many thought inevitable earlier this year has not come to fruition. Rather the economic recovery has been faster and stronger in some areas than anticipated. In fact some sectors have recovered to the point where they are operating at pre pandemic activity levels.
To try and explain why expectations have differed from the current situation, HBR considered the types of recessions and their drivers. While the pandemic forced a sudden, record breaking negative economic impact, the pessimism that followed overestimated the sustained impact.
According to the article, systemic fears of a new Great Depression, “would bring sovereign defaults, banking system collapse, and price deflation. Yet after a wobble prices stabilized, sovereign borrowing costs broadly fell across the world despite expansive borrowing, and the banking systems has shown few signs of liquidity problems. (In fact, after hoarding capital banks are looking to return capital again.) The broader systemic fears remain unfulfilled and never looked as perilous as in 2008.”
Cyclical fears also took a deep hold with the expectation of record levels of unemployment through all of 2021, massive numbers of bankruptcies, and a weak housing market. Again, the expectations failed to come to pass. While unemployment is still high as the new wave of cases has forced temporary closures again, in September it was already lower than it was expected to be at the end of next year. And the housing market has remained robust, remaining at record level highs.
So why have we outperformed expectations? HBR notes that there are three aspects of a recession that can explain the economic recovery we’ve seen over the past year.
This aspect looks at the root cause of the recession. A financial crisis, an act of nature, policy errors, or investment going bust. This year’s shock was different than the past two, which were both finance/investment driven and by their very nature require a longer period of time before a recovery can take hold.
As you would imagine, policy decisions play a direct role in shaping the road to recovery. According to HBR, there was a common misperception that the number of cases and related deaths would correlate to the economy, “a strong economic policy response effectively bridges some of the economic damage from less successful virus control efforts.”
In the recession of 2008 capital expenditures collapsed, resulting in layoffs and declines in production capacity. This year’s recession did not have excess investment or lending to “work off”. This combined with the swift policy response have so far helped to avoid significant structural damage.
As we look forward, we would be wise to remain vigilant, as there is still work to do. If we look at the economy, 46% of US consumption was unaffected by the pandemic. Another 16% was affected by the lockdown, but bounced back almost immediately once it was lifted. The other 38% is dependent on a vaccine.
Availability of a vaccine is the linchpin for the next phase of recovery. There are promising options hitting the market, and with cases rising and restrictions increasing, their release will help maintain the momentum of the past few months and help us to avoid a W shaped recovery.
As HBR states, “While monitoring the overall macro landscape remains important, leaders should not underestimate the importance of measuring, interpreting, and exploiting the dynamics of their own sectors and markets in order to be able to invest and flourish during the recovery and the post-crisis period.”