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The Voluntary Recession

“It’s difficult to make predictions, especially about the future.”

But when it comes to forecasting economic data for the first half of 2020, for once we know what’s coming:

So far, all we can truly know in economic terms is that the initial contraction will be very large. We have already seen dramatic numbers in many economies, with US jobless claims perhaps receiving the most attention:

But aside from being unprecedented in its ferocity and depth, this global recession is something else: voluntary.  This is an important distinction. While it doesn’t make a recession any easier in the short run, it does place things in a very different context to a ‘normal’ recessionary phase. 

Understanding that the recession is largely (and justifiably) ‘self-induced’ as highlighted by St. Louis Federal Reserve President Bullard is an important part of judging the shockingly weak data we are likely to see.  There is a difference between ‘typical’ recessions which reflect underlying economic imbalances which must be adjusted, and the type of temporary social and economic shutdown we are experiencing.

It is important to keep this in mind when we are confronted by headlines over the coming months, comparing weak data to past phases:

These headlines are designed to produce emotional responses that induce action (to make you click on a link, or buy a newspaper). Emotional responses that induce action are not normally a useful feature of investment decision making.

Policy Action

A key difference between a voluntary recession and the type of recession we have been used to in the past (albeit with less frequency) is in the nature of policy response.

During what Bullard has called the ‘pandemic adjustment period,’ the priority of policymakers is to keep businesses and families ‘whole’ by compensating for a short-term income disruption, rather than to encourage extra consumption or economic activity. Indeed, from a health perspective, the near term goal continues to be to limit economic activity.

In past recessions we wanted to restart economic activity as fast as we could, this time we want things to switch off for a short while.

In this regard the policy response so far has been enormous, with the US Federal Reserve Balance sheet expansion being just one example: 

The scale of fiscal and monetary stimulus in the major economies up to now is dramatic. Once restrictions begin to lift, and society returns to something closer to normal, it seems very likely that a substantial effect of the stimulus will remain in place – at least until a durable, positive effect has been seen.

How long?

The ‘unprecedented’ nature of this experience, in terms of its social, economic and political impact is irrefutable. The experience of China shows that it is also temporary.

Should developments in Italy, and other European nations, start to unfold in a similar fashion over the coming days and weeks, financial markets may start to anticipate what the world will look like once things are switched back on. And while getting back to full capacity will inevitably take some time, large parts of the economy could restart as abruptly as they were stopped.

The nature of such a recovery is hard to assess. It seems likely that there are areas within economies that will never recover, we do not know whether nations will face ‘second waves’ of outbreaks as is already being feared in Asia, or how far different policy responses in the initial phase will lead to differences in outcome over the longer term.

However, in spite of all these uncertainties, and the despite the almost universal description of current events as “unprecedented” it is still difficult for us humans to admit how little we know.

We still find ample evidence of the human desire to compare current events to those of the past, whether it be the average time for equity markets to bottom in a recession, patterns of bear market rallies, or looking at the economic consequences of past pandemics

Whether all, some, or none of these patterns will be of any use remains to be seen. What we can observe is that markets are pricing in very little probability of a sizeable recovery in economic activity in 2020 and that the magnitude and speed of price moves in the last few weeks would suggest a very high level of uncertainty and fear.

Things can always get worse, but even in unprecedented times it is valuable to focus not on what you think the future holds, but how confident the market appears to be in its own views and what rewards there may be to backing the chance that that consensus is surprised.


The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.