There is no question that the Covid-19 shock is different, compared with previous episodes of economic crisis. The roots are different. It started as what appeared to be a national crisis, but escalated quickly into a global pandemic. The nature of the shock, absent a medical cure, has left many economies with one option: social distancing and restrictions on economic activity are the only way to slow the spread of the virus.

The effects have been devastating for the global economy, resulting in a sharp deterioration in economic activity across many countries, against the backdrop of loss of jobs and hence demand for goods and services. While the downturn can be reasonably compared to the Great Depression in terms of the severity of the slowdown, the deterioration pace is far worse than what happened in the 1930s.

Another glaring difference is the duration of the slowdown. As the fundamentals of the global economy deteriorated over a four-year period during the Great Depression, the recovery was very slow as fundamentals were adversely affected, which made it difficult to recover over a four-year period.

In contrast, the nature of the Covid-19 crisis was a quick and sharp deterioration, and it is specifically attributed to failure to contain the virus, which remains the overarching concern, notwithstanding massive and unprecedented stimulus packages by the monetary and fiscal authorities. Hence, the crash landing of the Covid-19 crisis is unprecedented.

Given the crash landing, it is not surprising that the rate of unemployment in the United States has shot up from 3.5% at the end of February (a five-decade low) to more than 13% in a few weeks as more than 26 million Americans have lost their jobs. There is no question that many western economies are facing deeper slowdowns than ever experienced before, as many sectors have been virtually brought to a standstill given a full lockdown or nearly 90% restrictions on economic activity in most economies.

Therefore, the result has been catastrophic for employment, which has been magnified through the loss of income due to the bleak outlook against the backdrop of failure to find a medical solution in sight. In the United States, the problem is far more devastating for employment, given the absence of proper safety nets and flexible regulations that would stem the pace of job losses and business closure.

The results are very clear and the catastrophic impact on the global economy is evident, prompting many downward revisions. The consensus average forecast for global growth stands at -1.6%, and the International Monetary Fund’s World Economic Outlook is projecting a contraction of -3%.

One should caution, however, that economists are shooting in the dark, as this time it is different. It depends on the speed of getting the virus under control.

There is no question that Q2 growth will most likely turn out to be dismal, resulting in a sharp contraction of global growth. Q1 growth is likely also to have been much slower than previously forecast, given how the virus has affected China where the virus first broke out. Beyond what we have seen, it is difficult to project growth performance for the second half of 2020.

In one scenario, a medical breakthrough could be on the horizon, forcing a faster recovery than is currently envisaged, which could start to bear fruit in Q3 and accelerate in Q4. In another scenario, the virus remains a threat, forcing lingering restrictions that could deteriorate economic activity further in Q3 and Q4, and rendering stimulus packages totally ineffective given continued concerns about the virus threat and probability of recurrence.

Hence, the solution remains in the medical domain, which will determine the likelihood of the above two scenarios. One thing that is likely to be certain is that once the virus threat has abated, the speed of recovery could be almost as fast as the speed of deterioration given the pent-up demand, the massive policy support and the strength of fundamentals that many economies had before the Covid-19 crisis.

Following containment of the virus, many jobs lost will be reinstated once restrictions on economic activity are lifted and consumers resume their regular activity, albeit at a slow pace, till confidence is fully restored and the virus scare is fully under control. Another glimpse of hope is the health of the financial sector.

Banks entered the Covid-19 crisis in a stronger and sounder position than in 2008/09. Hence, banks are likely to be the solution to help the economy in this crisis, rather than being the source of the problem as in 2008/09, which triggered massive financial meltdown with protracted adverse effects on aggregate demand and economic conditions.

While falling consumption and investment have forced a sharp deterioration in economic activity in the Covid-19 crisis, the recovery could be fast once the virus scare is contained. There is no question that asset quality will deteriorate during the Covid-19 crisis, but the deterioration is likely to be short-lived once normalcy is restored and regulators work closely with the financial sector to address ways to contain the adverse effects on financial stability.

The longer we sustain the lockdown, the deeper the scarring to the economy and the slower the recovery. As bleak as this may be, it gives us optimism that the recovery could be fast once a cure is on the horizon or the peak of the virus has been reached, paving the way for some restrictions to be lifted.

No one knows when this scenario will be realised, but we remain optimistic listening to the views of medical experts, giving us confidence that once this point is reached, the speed of recovery will be far quicker than what the world experienced during previous crisis episodes.

We share the views, however, that the recovery shape is not likely to the symmetric V-shape, but rather an asymmetric V-shape, where the upward leg is likely to be flatter than the downward leg. It is normal during crises that the recovery of sentiment would be slower to restore, but once restored, the speed will pick up momentum to reach the initial point.

We also agree with concerns that asset quality deterioration would be difficult in the near term, which requires careful regulatory oversight to institute necessary forbearance and restructuring.

Another area that warrants careful monitoring relates to the implications of the fiscal stimulus packages for debt sustainability. Countries that had limited fiscal space at the beginning of the crisis are likely to remain vulnerable, necessitating access to concessional financing to sustain fiscal and external sustainability.

There are also concerns that once demand is recovered, the speed of pent-up demand could outpace recovery on the supply side. This will demand careful policy coordination to ensure timely withdrawal of stimulus while using targeted support on the supply side to avert the risks of stagflation.

Regardless of the course of recovery, the trigger is in the medical domain. Once a solution is in place, policies should be focused on gradual withdrawal of stimulus measures without jeopardising the recovery. Policy must ensure that economies do not graduate to long-lasting imbalances that could leave them in far worse positions than what was mandated by the risks of the virus and the immediate adverse implications for economic activity and private sentiments.

As for recovery in sentiment, that all depends on the duration of the shock and its aftermath for business and consumers’ income as well as their assets’ value. If economic activity is restored quickly, employment and income will pick up, paving the way for recovery as the Covid-19 shock is not likely to have long-lasting adverse effects on private sector balance sheets.

But, a prolonged duration of the crisis could leave a long-lasting adverse impact on personal and corporate balance sheets, demanding further secular stagnation that would make returning to pre-crisis levels even more difficult.

It all hinges on the medical solution and prudent decisions to resume a steady path towards normalcy.