The shape of recovery

As the wintry chill replaces the late autumn, the pandemic continues to claim more and more victims across the northern hemisphere. With or without former lockdowns, economies continue to struggle. Possible good news about vaccines notwithstanding, a recovery doesn’t seem imminent. Forecasts made merely a few weeks ago, thus, appear to be already obsolete. Nonetheless, it is worth paying attention to three recent reports by the IMF, the World Bank, and the Asian Development Bank, not because of their projections as such, but the analysis underpinning them.
That is, in what follows, the focus shouldn’t be on the numbers, but the narrative. And a quick recap of the alphabet soup of the shape of recovery would be a good place to start.

The most optimistic narrative is of the V-shaped recovery, which holds that there is nothing fundamentally broken with the economy, and as the pandemic ends, activities will be roaring back, along with jobs and income. A less rosy, but still optimistic story is the U-shaped recovery, which is similar to the V in terms of a rapid rebound, but the trough is lower and longer. Then there is the W-shaped case, where an initial rapid recovery is likely to be followed by another sharp deterioration in case of further lockdowns. The most pessimistic one is the L-shaped trajectory, whereby the economy does not actually recover to the pre-pandemic growth path into the medium term — essentially, the pandemic lays bare the existing problems in the economy or scars enough sectors in a way such that growth remains slow even when the pandemic is over.

The 2020-21 Budget is predicated on a V-shaped recovery, whereas the World Bank is in the L-camp, with the ADB and the IMF being somewhere in between (Chart 1 —all reported in financial years).

The IMF released the latest edition of its World Economic Outlook in mid-October. The WEO is generally regarded as the most comprehensive guide to the global economic conditions, near term outlook, risks, and policy challenges. The current edition is, unsurprisingly, more useful for the analysis of what has been happening, rather than what might transpire: around the world, economic activities rebounded robustly in the middle of the year as the initial lockdowns ended; but the recovery stalled in more recent months with the second (or third) wave of the pandemic; and, unlike in the past recessions that hit manufacturing harder than services, this time round it is the services that have suffered more because of social distancing measures. Assuming that social distancing continues into 2021 before easing as a vaccine is introduced, with normality restored by end 2022, the world economy is expected to contract by 4.4% this year before rebounding by 5.2% in 2021. Except for China, all the major economies around the world, emerging and advanced, are expected to contract this year. 

While the Fund provides forecasts for Bangladesh, the WEO doesn’t have any detailed analysis on the country —there is usually an annual country report based on a field mission, which I would imagine isn’t likely this year. We can, however, compare the IMF numbers with those of ADB and the WB, who have country-specific analysis.

Let’s start with the ADB, clearly the rosiest of the three multilateral agencies. In its Asia Development Outlook 2020 Update, published in late September, the regional bank sees the Bangladeshi economy returning to 10-year (to FY2019) average growth path in 2021 after a modest dip in 2020. Charts 2a and 2b give an indication of ADB’s optimism. In these charts, IMF’s projections are on the vertical axis, while the ADB’s assessments are on the horizontal axis. To the extent that both institutions are basing their analysis on the same information, countries in the chart should be close to the diagonal line. If a country is below the diagonal line then it means the ADB has a stronger outlook for the country. And that certainly is the case for Bangladesh.

Whereas the IMF believes economic growth clocked in at 3.8% in 2019-20 financial year, the ADB takes the government figure of 5.2% at face value. The biggest problem with the official estimate of 5.2% real GDP growth in 2019-20 financial year is not exaggerated figures reflecting political chicanery. There may well be political shenanigans, but the more fundamental problem is that the national accounts statistics are produced annually, and thus miss the quarterly movements in economic activities. In normal times, this doesn’t matter much. But 2020 year is not a normal year, and the official GDP figures are simply not capable of capturing the impact of the lockdown during the April-June period.

Instead of relying solely on the official GDP statistics, the World Bank takes a broader approach. Its latest South Asia Economic Focus, published in early October, notes that travel declined across the country between March and August, and night lights became dimmer. Using google mobility data, electricity generation, government tax revenue, readymade garments exports, and import of vehicles, the WB estimate that the economic activities were growing at over 5% in the year to March, but contracted in the year to June. Overall, a mere 2% growth is estimated to have been recorded in 2019-20. 

The difference between the institutions’ assessment of Bangladesh is even starker when it comes to the outlook for the 2020-21. The ADB expects that the economy will grow by 6.8% in 2021, much faster than the IMF’s expectation of 4.4%. In contrast, growth is expected to weaken even further to 1.6% by the World Bank.

Abstracting from the numbers, let’s consider the narratives. The view from Manila is that by the beginning of the calendar 2021, ‘a strong manufacturing base will enable more rapid recovery’, as international trade restarts, while a revival in remittances will support consumption, which together with policy stimulus will boost investment. The view from Washington DC is that consumption will ‘remain subdued with depressed wage income and a decline in remittance inflows’, investment will continue to suffer from the heightened uncertainty, and there is no imminent revival of international trade. And all three institutions stress the risks surrounding these projections.

Suppose a vaccine is successfully rolled out much earlier than expected, leading to a rapid reduction in cases, boosting confidence, activities, and incomes. According to the IMF, this could raise world GDP growth by about half of a percentage point. On the other hand, if the current containment measures prove inadequate and a vaccine proves elusive, the Fund fears that the world GDP may grow by only 2.2% next year. The ADB also finds that further lockdowns and longer pandemic would curtail growth in the advanced economies, which would spill over into Asian economies. The World Bank explicitly models a number of downside scenarios. In one, remittances dry up, and as a result, Bangladesh economy contracts in 2021. In another, there is a debt crisis that can be, fortunately, mitigated by prudent public policy.  

As it happens, even the IMF forecasts, let alone the ADB, might be too optimistic. As recently reported in the Economist, the Fund is usually slow to recognise a downturn in developing countries. Further, events have already made these forecasts, barely a few weeks since publication, obsolete. Once a vaccine is rolled out, we may well get a strong rebound. But that is likely to be some way off. Until then, we need to accept that the economy is in dire straits.