Economists Warn Full Recovery Could 'Take Years' as Fed Index Sees Worse Collapse Than During the Great Recession

The global economy, heading for its worst year since the end of the Second World War, could "take years" to fully recover to its pre-coronavirus norms, economists warned.

The consultancy Capital Economics said in an update that it forecasts the global economy to fall by more than 3 percent in 2020, down from its previous forecast of around 3 percent growth. Such a slip would mark the worst year since 1945, when global gross domestic product (GDP) declined by 5.5 percent. "Most of the output lost in the first half of this year will probably be lost forever," wrote Vicky Redwood, senior economic adviser at Capital Economics.

On Monday, the Federal Reserve's Weekly Economic Index collapsed to lower than during the Great Recession. The index measures U.S. economic activity on a weekly basis using private sources such as industry groups and polling companies. "Developments in the past week saw the index fall to a level unseen since 2008," wrote the Fed economists who compile the index.

Last Thursday, the Department of Labor reported 3.3 million unemployment claims for that week across the U.S., the highest number since records began in 1967. The previous week saw 281,000 jobless claims.

Measures to manage the coronavirus pandemic such as quarantines and lockdowns have choked the global and domestic economies, causing a sharp and sudden decline in demand and output that has caused millions of job losses.

It is widely accepted by economists that the global economy is in a deep recession. But this differs from the previous recession caused by the financial crisis, which was brought about by complex structural issues.

Instead, this is what is known as an exogenous shock — a sudden and unexpected external event that harms the economy — and there are hopes of a V-shaped recovery; a deep and quick recession followed by a similarly sharp and speedy period of healing.

Several governments have introduced vast and unprecedented stimulus packages to help their economies through the worst of the current shock. The U.S. Congress passed last week a $2.2 trillion stimulus bill, including checks for Americans and government loans for businesses.

Redwood of Capital Economics wrote that while the supply-side of the economy will probably recover quickly as people return to work once the pandemic passes, there may be a lagging problem with demand.

"The world is heading for the sharpest and deepest global slowdown since WW2," Redwood said. "Assuming that the virus is brought under control within a few months, the subsequent rise in world GDP should also be sharp. However, it could still take years for demand to recover completely."

Demand could be subdued by lingering fears of a second wave of the virus, Redwood said. Demand for travel may weaken, firms will begin to pay back the loans that saved them, and more public debt could beget another period of government austerity.

"Most economies should ultimately return to the path of output they were on before the crisis," Redwood wrote. "We are not so pessimistic as to expect the U-shaped recession that some are predicting, with economies bumping along the bottom for a long time. In fact, this recovery should be strong by past standards.

"However, with demand weakness lingering, it may well take a few years to get back to where we were and even longer for some economies. Moreover, the world that follows may be fundamentally different in many respects, such as the role of the state and the future of globalization."