This Time, It’s Physically Different

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Is the recession induced by COVID-19 anything like previous recessions? Campbell R. Harvey, Duke University Professor of Finance, finds that it is similar to past crises, but it has some very important differences. As part of the 73rd CFA Institute Annual Virtual Conference, he discussed what the recovery will look like, whether it will take as long as previous ones, and what the potential risks are.

Harvey highlighted the predictive relationship between an inverted yield curve and a recession, suggesting that while this recession had been previously predicted, it is unlike others because it has a biological cause — not a financial or economic one. This should mean important differences in the outcome and timing of the recovery.

The uncertainty surrounding this recession is very different from previous economic crises. It is usually very hard to predict the duration of recessions and their total impact, especially when they are underway.  For example, the recession that followed the 2008 Global Financial Crisis was statistically over by September 2009, but unemployment did not return to pre-crisis levels until May 2016.

Because the current recession has a biological cause, Professor Harvey suggests that it will have a natural end once a vaccine is produced, which could be as early as the fourth quarter of 2020.

This difference in uncertainty also has a psychological impact. During the Great Depression, the expectation was that any lost job would be lost for a long time, and that those jobs would be very difficult to replace. Today, despite the true level of unemployment likely being 24%, similar to the 25% during the Great Depression, most furloughed workers expect to return to their jobs relatively soon.

Being able to forecast the end of a recession means that different measures of support can be provided. In a recession with no end date, policy makers cannot throw everything at the problem. With an end in sight, they can be more generous.

The biological cause, the temporary nature of job losses, and the ability to offer greater support over a finite period of time suggest that the recovery may be more rapid than some are expecting. Harvey suggested that a return to growth was possible by the fourth quarter of 2020 or the first quarter of 2021.

However, there are risks.

Structural damage could be a problem for economies around the world. What happens if profitable companies collapse and jobs are lost permanently? To help avoid this, policy makers are supporting jobs and businesses rather than supporting specific sectors, which is a departure from the playbook that followed the Global Financial Crisis.

Another concern is the debt being used to pay for the recovery, which will need to be repaid. This raises the prospect of higher taxes or inflation in the future — both of which present risks to growth.

This year, archived recordings of every presentation from the CFA Institute Annual Virtual Conference will be available online, with additional insights and commentary published on the CFA Institute Annual Virtual Conference blog.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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