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Here comes another recession

The two-month coronavirus shutdown will be bad enough, but so will the inevitable recession that follows, says RB’s The Bottom Line.
Photograph by Jonathan Maze

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The next two or three months are going to be awful. Restaurants will be shut down altogether, or they’ll be on takeout- and delivery-only. With no NBA games or business travel or spring festivals, it’s going to be a difficult period for many restaurateurs.

But the aftermath is just as uncertain.

A recession seems inevitable. Bank of America, for instance, says the country is already in a recession as it is. Many other economists have said the same thing.

We typically do not know we’re in a recession until long after it has started. A recession is usually defined as two straight quarters with a negative gross domestic product, or GDP. Thus, it typically takes six months before we know it’s a recession.

In this case, however, that conclusion seems obvious. Economic activity has declined steeply in March, which will probably be enough to shrink GDP for the first three months of the year. An April and May with a steep decline in economic activity probably means next quarter will be negative, too.

Deutsche Bank, for instance, believes the global recession will be the worst since World War II. The bank says the economy will bounce back relatively quickly at the end of the year. But many other economists aren’t so sure, with a number of them saying the recovery will be “gradual.”

Treasury Secretary Steve Mnuchin, pushing Republican senators to back a relief package, said inaction could lead to 20% unemployment.

To be sure, Congress will likely step in with some form of relief to keep the economy from completely tanking. If the government gives Americans paychecks, for instance, those Americans will probably spend some of the money at restaurants once they can actually go to them.

Yet one of the scariest things about the coronavirus shock is what happens when it all passes.

The economy will not go back to the way it was, certainly not very quickly. A lot of people are going to lose their jobs in the coming weeks, and many in the restaurant industry already have as restaurateurs shut down and furlough thousands of employees.

Many expect that consumers will rush out and start spending once this is over. But that’s not necessarily true. Morningstar Inc., for instance, said in a note Thursday that it expects an “uneven traffic recovery” into the second half of the year.

Indeed, consumers may spend whatever checks the government sends them, but it’s just as likely that they hold back some spending, too, as they prepare for an uncertain economic future.

Much depends on the severity and length of the coronavirus shutdown. A restaurant in-store dining closure of two or three months would certainly devastate many operators and chains. Many of them will not survive.

Theoretically, those that make it through to the other side will be stronger. But they’ll be likely operating in an economy in which consumers’ confidence is badly shaken and many will still be without jobs.

Having a customer base that is employed and spending money remains the most important factor in a restaurant company’s success. If more people are unemployed, then restaurant sales as a whole are more likely to be weak.

In other words, restaurant companies need to not just prepare for the next couple of months in which they won’t have much in the way of sales, but also for slower business once things get back to normal.

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