The primary debate among economists is how badly the world economy is damaged now and will be in the future. There are well-regarded proponents of the “V-shaped,” “U-shaped” and “L-shaped” recoveries. The primary difference among their views is how long the current global recession will last.
One of the most carefully followed experts is Fitch Ratings, which grades the financial prospects of tens of thousands of corporations and governments around the world. Fitch was founded in 1914 and has been a major force in the financial rating system for decades. Fitch’s economists recently made the argument that the gross domestic product drop will badly harm the world’s advanced nations until the middle of this decade.
How bad will the damage be? Fitch looked at its previous forecasts of the GDP of these advanced countries and dropped it by 3% to 4%. There are 39 nations in this category, led by the United States, Japan and countries in Europe. For some nations, that means no growth at all for the period. The effects will be triggered mostly by three trends. The first is years of high unemployment. The second is a decline in demand for goods and services that rely on the jobless rate. The last is that investments by governments into companies will fall quickly and not recover until mid-decade. These investments often drive job growth.
It is not surprising that uncertainty about the path and spread of COVID-19 is the single greatest contributor to a slowing of economic growth. And the growth is not affected by traditional reasons. It is fear on the part of governments and corporations that they have no visibility about what the spread will be.
To illustrate its point, Fitch looked at the United States based on its new estimate GDP, which is a growth of 2% between 2023 and 2025. That is down from 3%. While that change may not seem like much, it is worth remembering that American GDP is as high as $20 trillion by some measures. So, a downward revision of 1% represents a drop of hundreds of billions of dollars.
Fitch’s analysis speaks to the shape of the decline and recovery of America’s GDP. A V-shaped recovery is based on the assumption that GDP will return to prerecession levels by the end of this year. With a U-shaped one, the assumption is that the bottom will last for a number of quarters and then will slowly start to rise. The Fitch forecast is that the recovery will be L-shaped, which assumes that it will take years.