How The Alphabet Can Tell Us About the Possible Economic Outcomes

“Forecasting is hard, especially the future.”

Many moons ago, we learned about the alphabet song, “A for Apple, B for Ball…”

And yet, the shapes of alphabets have been used for some time to help economists and statisticians project and depict market recovery.

Optimistic, neutral or grim outcomes can be projected using these shapes. Let me share some of these outcomes from the articles I have been reading.

1. V-Shape

Scenario 1: This was the most optimistic scenario that economists planned in early Jan 2020. They felt that that the virus will clear up by April, May, and the social distancing rules implemented, will be relaxed.

☀️ Implications: Wuhan just lifted her lockdown after 72 days. If China recovers in time, and turns on her manufacturing capacity in full, we may expect China to be able to pull Asia, and the world along. Meanwhile in Europe, Factories and services will adjust and reopen.

2. U-Shape

Scenario 2: The virus continues till June. Social distancing rules is still needed, and only loosened from end May onwards.

🍿 Implications: it will take time for the pent up demand of products and services to be in full swing. Most will still have debts to clear, and trading remains sluggish.

An example will be that of a swimming coach. No parent will allow their children to simply jump into the pool immediately after a ‘green light’. It will take at least 3-4 weeks for swimming lessons to resume. Magnify this scenario many times to the manufacturing capability of a MNC, and a country.

Trading partners take time to pick up, but recovery will happen, albeit late 2020 and beyond.

3. L-Shape

Scenario 3: The virus continues indefinitely till end of the year, and worsens again in the winter periods in the northern hemisphere.

Global economy also gets hit by other factors beyond the virus, as every country decides to protects herself first.

  • Better market recovery from China
  • Emerging market crisis.
  • US-China Relationships go south even further
  • Oil market rout

😱Implications:

  • Better market recovery from China as it accepts the situation as a new norm and adapts even more aggressively to pull herself out from the rut.
  • Emerging market crisis. Pressured politically and from real Cashflow issues, Companies shift their manufacturing plants out of China.
  • Oil market collapses, as Russia and Saudi Arabian supply continues to grow
  • US-China Relationships go south as tension flare on both political and economic domains: trade wars; handling of Taiwan and Hongkong etc…

4. W-Shape

Scenario 4:

This is actually the most pessimistic and probable scenario.

After fading away initially in June/July period, the virus returns in Sept to end of the year. Could be due to overconfidence in the earlier efforts, controls are loosened, and clusters start to form with exponential increases.

We can see this in Singapore currently, as our gold standards in controlling the virus come under intense scrutiny.

🎢 Implications: Uncertainty reigns, and restrictions are re-imposed. It’s a recovery followed by a plunge into recession. This is a sucker punch to a celebratory session, as it kills the people’s morale. It may kill the economy for the next 9-12months, thereafter.

 

5. ✅ -Shape

Scenario 5: This shape is similar to that of the ‘Nike swoosh’. It may be similar to that of the U, but the difference is that recovery is distinctively sharper. Business and spending slowly resumes, as governments ease on the limits.

🍟 Implications: People remain cautious of overspending, and even job switching because of the fear of debts. Nonetheless, recovery outputs will still be higher than that of late 2019, about 18 months after the sharp downturn in early 2020.

*Source Material adapted from The Edge Singapore, and Bloomberg

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