The global economic recovery from the recession triggered by COVID-19 will be a drawn-out "U-shaped" one where consumer confidence gradually returns instead of the dramatic "V-shaped" recovery where pent-up demand unleashes a massive economic boom, according to HSBC.
More specifically, HSBC predicts a U-shaped recovery with a "jagged bottom" after the first wave of COVID-19 spends itself later this year. This less dramatic recovery marked by slow growth in consumer spending will benefit countries with strong fiscal positions such as Norway and New Zealand.
In a U-shaped scenario, an economy fails to respond immediately as it exits from its lockdown, said David Bloom, Head of Global Foreign Exchange Strategy at HSBC. The expectation for a delayed rebound, however, will continue and there will be multiple "false dawns" causing a "jagged bottom" to the U-shaped curve.
Of the recoveries from U.S. recessions since 1945, about half were described by economists as U-shaped. These included 1973 to 1975 recession and the 1981 to 1982 recession.
Bloom believes the economic recession won't likely worsen beyond April's unprecedented crash in oil price futures to negative $40 and the more than 30 million job losses in the United States. He also said it's unlikely a V-shaped recovery similar to the one that emerged after the Great Recession of 2008 will occur. He called predictions of a V-shaped recovery, "optimistic."
"It is much more likely that we are in this kind of U with a jagged bottom scenario, and the (U.S.) dollar kind of does well but this is your NOK (Norwegian krone), your yen, your Aussie, your Kiwi," said Bloom to CNBC.
"Some of them have great fiscal firepower to keep trying to push this economy. Even if it doesn't come, they're doing another fiscal package and they've got the money."
Bloom also discussed HSBC's game plan in the event of L-, U- and V-shaped recoveries. He said economists should make plans for all eventualities. In the unlikely V-shape recovery scenario, these two currencies alongside the Norwegian krone and the Canadian dollar are ones to watch, Bloom suggested in the note, given that they have been most adversely affected during the "risk-off" period and thus have further to rebound.
"They are also best placed to capitalize on the commodity price gains alongside the economic upswing," Bloom added.
While the Norwegian krone is among the best-positioned currencies across all three recovery scenarios, however, it would be one of the most exposed should none of these transpire and the economic situation worsens.
In April, a Reuters survey saw more than 500 economists saying most major economies are in the grip of a severe economic downturn. More than 55% (87 of 155) of the economists in this poll said the global economic recovery will be U-shaped. Thirty-one said it will be V-shaped and 24 said it will be more like a checkmark. A few respondents expected a W-or L-shaped recovery.
