What can history tell us about the outlook for the current recovery?
As discussed in our accompanying piece, the recovery appears to be underway. The speed of change has been unprecedented in such a short period: from moderate growth to an unusually severe (albeit short) recession to the early stages of a recovery that was more robust and rapid than economists had expected. All of this has transpired before the government even publishes its first report on Q2 GDP, which is set for released on July 30.
Whatever that report reveals, it’s clear that the contraction was severe. What does that mean for the recovery? As illustrated by the chart above, more severe downturns have tended to be followed by stronger rebounds in the following year. This may be explained in part by the policy response (both monetary and fiscal). Severe recessions have typically been accompanied by more aggressive stimulus measures to blunt its impact. That certainly held true in recent months, with aggressive monetary stimulus accompanied by an unprecedented fiscal response.
After every recession, the economy requires time to heal and to return to its prerecession strength. Today, progress could be slowed if the recent surge in COVID-19 cases persists, prompting another wave of shutdowns. Still, if history is a guide, as that risk fades and a durable recovery starts, growth is likely to not only be well above long-term trend but could exceed the rebound that has followed a more typical recession.
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