“India may see U-shaped recovery only by August, say, experts.”
“India must not chase the dream of another V-shaped recovery in Covid carnage.”
“SBI cuts FY22 GDP growth estimate to 7.9%, sees ‘W-shaped’ recovery.”
“India to see ‘k-shaped’ recovery as inequalities grow: ex-RBI governor.”
During the past one and a half year, numerous economic estimates have been reported by organizations across the globe. To those who frequently keep an eye on the news, these headlines may seem familiar. To understand these theories about recovery, one must first understand the features of economic recoveries and what these letter-shaped graphs stand for.
Understanding recessions and recoveries
A standard business cycle experiences the stages of expansion, peak, Recession, depression, trough followed by a recession; a circulation through these phases is typical for any economy. However, the time spent in each of the stages is relative. Economic recovery, therefore, is the period that follows an ongoing recession (for our context, the event in the discussion being the Covid-19 pandemic). During this period, the restoration phase of the economy sets into motion. Rise in income levels, unemployment level going down, acceleration of production and active trading, an overall increase in the GDP are some of the factors that indicate the beginning of a nation’s journey on the path to a well-adjusted economic environment and the acceptance of a new normal. Recovery behavior is often understood by using an amalgamation of leading and lagging indicators that help the country find a proper footing in the existing environment.
To further understand recoveries, it is imperative to know the true sense of Recession and its standard behavior. In layman’s terms, a recession occurs when there is a decline in generic economic activity. For a further detailed and specific definition, one can refer to a Recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales” (by National Bureau of Economic Research, a private American economic research organization). There is a shift in psychological sentiments and tangible output when a nation is about to enter a period of Recession or is in the process of getting out of one.
To recall diverse episodes of economic resilience, one could go back to the literature during the times of the 2008 Financial Crisis, the Greek Recession from 2007 onwards, the SARs epidemic, the Asian Financial Crisis of 1997, or even further back in history to the Great Depression of the 1930s and the period post-WW II.
Moving on to the central focus, recoveries are often referred to as a shape when they are linearly plotted. Often, these events and the events that occur preceding and succeeding to it form a letter-like shape. The letters resemble the shape of the economy on a graph that shows GDP plotted against time. Common ones are V, U, W, L, and K. Economists and academicians use these to explain the events along the curve and then investigate their occurrence. Let us further discuss these shapes to understand better,
V-Shaped
A V-shaped recovery is usually witnessed when the period of Recession is short-lived. In this case, there is a sharp decline in the economy, but at the same time, the recovery is at an equally faster pace. For a suffering economy, this could be the best possible outcome of a recessionary period, primarily because of the dynamic adjustment of the economy along with the quick recovery in primary aggregate metrics of macroeconomic performance.
An example, Recession in the US during the period post World War I (1920-21); the rough period was short-lived. Still, the country was adjusting from significant shifts in industrial activity, government spending, and inflationary monetary policies that had been steered to the war effort.
U Shaped
When the state of the economy experiences a steep fall in a short period, and the recovery is comparatively slow and stagnant, the shape of the recovery graph takes up the form of the alphabet “U.” The path to healing in this scenario is relatively healthier as the economy gradually arrives at the previous peak. Odd but understandable, a bathtub is often used as a metaphor for this shape.
An example, recent reports have indicated a “U” shaped recovery for India after devastating nationwide effects of the second wave of the Covid-19 pandemic.
W Shaped
Also known as a “double-dip” recession, in the case of a “W” shaped recovery, there is an initial steep fall which could hint towards a “V” shaped graph, but the sudden change of events and surprises could lead to another fall after a particular growth phase. The second contraction is relatively more minor, after which the nation moves on to fully recovering towards pre-recession levels. W-shaped recessions can be particularly painful reason being the brief recovery that occurs and can trick market participants.
An example, The Euro Crisis, which started from 2011 onwards through 2013, is a good example. The Eurozone countries were still suffering from the aftermath of the 2008-09 crisis. With this, several other factors like weak economic growth, rising energy costs, failing investments, and so on led to another recession in the geography.
L Shaped
This one could be termed as a worst-case scenario of a struggling economy. The L-shaped recovery has the lengthiest recession period of all – so long it is sometimes termed a depression. The revival of the state could take years, accompanied by a dreadfully slow growth rate. It would most definitely take multiple years for economic trends to behave as the pre-recession era. In this case, post a fall, the GDP recovery assumes a gradual and lengthy pace to gain back the previous momentum.
For example, the infamous Lost Decade in Japan, which resulted from the asset price bubble, is a prevalent example of this kind of recovery behavior. Once the bubble burst, a stock market crash followed, and the annual economic growth slowed from 3.89% to an average of 1.14% between 1991 to 2003.
K Shaped
During a “K” shaped recovery phase, there is a contradictory bifurcation in the behavior of certain aspects of the economy. Post a recession, it is quite possible that specific industries/sectors could flourish, following the path of a “V” or a “U.” Still, at the same time, particular industries/sectors could further show disappointing figures. Their growth rate may not be at par with the rest; in this case, it takes them longer to revive. Ultimately, this graphically results in a “K” shape.
An example is a relatively newer term, often used to describe the offset of the Covid-19 pandemic. Throughout this, one can observe that some could continue operations and pivot to better models (e.g., tech companies). In contrast, businesses that depended on physical interaction found it difficult to sustain (e.g., travel and tourism).
In addition to these, the shape of a square root sign, an inverted square root sign, “J” shaped, and at times “Z” shaped recoveries have also been recorded and are used to describe the post-recession working of economies.
Understanding these trends helps economists, investors, governments, and all the other market participants, whether retail or institutional, further plan their strategies and policies (for authorities) to reap the best outcome of the prevailing situation. Specific standard monetary and fiscal protocols were followed during these times, but the responses are highly relative to the country in the discussion. For India, the series of budgetary stimuli announced is an example.
So the next time you read a headline like that, you now know precisely what you should be picturing.
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Sources
- Economic Recovery: Definition and Types (V, U, W, L-Shaped … – IG
- Shocks, recessions, and recoveries – lessons from history – The Monday Briefing
- Recession Recovery Shapes: What the Different Letters Mean
- Types of Economic Recovery – Knowledge Series
- K-Shaped Recovery Definition
- Understanding U-Shaped Recovery
- W-Shaped Recovery Definition
- L-Shaped Recovery Examples
- Soros says the US faces a “lasting slowdown.”
- U-Shape? V-Shape? Recovery Shapes Explained And What They Mean For America’s Economy
