Market Overview

Why The Economic Recovery Likely Won't Come Until 2023


John Gallo, BNP Paribas head of global markets, has some advice for those anxiously awaiting the end of the recession born of the coronavirus pandemic: Hunker down.

The earliest the economy might return to a pre-COVID level? According to Gallo, it’s mid-2022—perhaps even 2023. 

“There are a reasonable amount of market participants who still think that the effects of COVID are going to magically disappear -- that there is going to be an inexpensive vaccine in reasonably short order,” he said. “But the reality is that it’s going to take time for us to develop a vaccine, send it through trials, and then distribute it.”

None of those activities will be easily accomplished, though some impressive strides have been made on the development front. According to the BBC some 240 pharmaceutical companies from around the world had vaccines in the pipeline as of late September, and 40 of those had reached the trial stage.

But short of a vaccine’s widespread distribution, Gallo believes that the health crisis will continue—and as a result, so too will the economic crisis.

“For now, the Federal Reserve has exerted an artificial influence on the markets by making a number of moves after the outbreak took hold in mid-March—moves that were significantly more aggressive than those taken in response to the 2008-09 financial crisis,” Gallo said.  

The Brookings Institution supports that claim, reporting 17 influential Fed activities, the most notable being a decision to lower interest rates to between 0-0.25%. The Fed also announced that rates would remain low until there were clear signs of recovery.

Gallo also points out that the access that corporations have had to the capital market—in large part facilitated by the Fed—has been unprecedented. As a result, these companies have been unduly influencing the markets, though it remains to be seen what might happen in the months ahead. 

“I do think we will start to see bankruptcies and potentially some correction in both the corporate and the equity markets as it relates to companies that have seen their business models affected.”

Gallo, who was once the youngest managing director in Lehman Brothers history, is also not alone in the belief that the economic downturn is a long-term proposition. An October 12 Bloomberg report called the U.S. recovery “moderate” to that point, noting that unemployment claims remained four times higher than they had been before the outbreak and that the number of Americans who had stopped looking for work had increased at an alarming rate.

No less worrisome, Bloomberg noted, was the fact that new COVID-19 cases had jumped by some 331,000 the previous week, its largest spike in two months. The conclusion reached in the piece is the same one reached by Gallo: Finding a vaccine is essential to restarting the economy.

Back in May, the analytics firm FiveThirtyEight polled macroeconomic researchers on the likely length of the recession, and the greatest number of them—40%—believed that it would last into 2022. Thirty-two percent saw it extending into 2023, while 17% believed it will end by the latter stages of 2021. Only 11% foresaw it being over early next year.

In Gallo’s view, the current market conditions are “more volatile” than they were during the ‘08-09 slump, noting that by the second year of the earlier crisis, we were already clearly on the road to recovery. There have been no signs of a similar rebound at present, despite the Fed’s intervention.

The Brookings Institution suggested additional steps might be necessary to prop up the economy in the near future, and Gallo does not disagree, saying that “substantially more fiscal support from the government” is going to be needed to dramatically impact the economy. But again, nothing short of a widely-distributed vaccine will put an end to all that ails the U.S/—and, really, the world at large.

As of October, the pharmaceutical giants AstraZeneca (NYSE: AZN), Moderna Inc (NASDAQ: MRNA), Pfizer Inc. (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ) had made the greatest strides on the vaccine front (the latter company before it had to put a Phase 3 trial on temporary hold when one of the subjects of that trial fell ill). But a definitive solution has yet to emerge.

Dr. Robert Redfield, head of the Centers for Disease Control, told a Senate subcommittee in September that a vaccine would not be “generally available” until “late second quarter, third quarter 2021,” though Paul Mango of the Department of Health and Human Services had previously announced that as many as 700 million doses of different vaccines would be on hand in March or April of next year.

As the New York Times reported in October, these companies are attempting to fast-track a process that normally takes years. The Times further pointed out that the first vaccines to emerge might only offer “moderate protection” from the virus, and quoted Dr. Gregory Poland, director of the Mayo Clinic’s Vaccine Research Group, as saying that “complexity and chaos and confusion” likely await in 2021.

If one thing is clear, it’s that there is a long road ahead, in both the public health and economic sectors. And while the Federal Reserve has built a temporary firewall, that barrier needs to be reinforced while we all work through a process that could feasibly extend another three years.


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