There is no doubt that the economies across the globe had sharp contractions due to the coronavirus pandemic. However there has been much debate about the timing and magnitude of the recovery that follows. Economists and bankers alike have been using an alphabet soup to describe the potential recovery that follows once this virus is behind us. It is certainly confusing to grasp what V-shaped, U-shaped, W-shaped and whatever-other-shaped recoveries mean. This post is to demystify the much-discussed recovery shapes.
The Types of Economic Recovery Shapes
V-shaped: This economic recovery shape consists of a sharp decline followed by a sharp rebound of similar magnitude and interval.
U-shaped: This is derivative of the V-shaped recovery where there is a more gradual and longer decline followed by a gradual recovery. The Global Financial Crisis, also known as the Great Recession, is a clear example of a U-shaped recovery if you look at the quarterly GDP (gross domestic product).
W-shaped: This type of recovery is characterized by a strong and fast comeback followed by another economic dip. A possible explanation is that the economy experiences another shock.
L-shaped: The level of activity declines precipitously and essentially flatlines over the course of several years, thereby taking a long time for the economy to recover to its previous peak.
Swoosh-shaped: The name was inspired by Nike’s logo popularized by Michael Jordan and his eponymous Air Jordans. This shape consists of a sharp decline followed by a steady and gradual recovery. A close cousin to this concept is a partial bounce followed by a more gradual recovery.
What Shape Will This Recovery Follow?
This is under much debate and only time will tell what the GDP or economic recovery will look like. However, we can certainly make an assessment based on what we know so far. One way is by a process of elimination.
V-shaped: The sudden halt to activity associated with national lockdowns triggered a steep descent into recessions around the world, which confirms the left side of the V. However, an equally sharp ascent during the recovery phase characterizing a V-shaped rebound is unlikely as much of the recovery is expected to be more gradual.
U-shaped: We can eliminate this recovery option almost immediately as the economic contraction experienced in 2020 was sharp and sudden, and not gradual suggested by a U-shaped recovery curve.
W-shaped: This is a very plausible scenario should there be a resurgence of the virus resulting in another dip in the economy. Most economists are optimistic that the second wave, if there is indeed one, will be more manageable given the lessons learned during the first wave.
L-shaped: Most economists believe that this is the least likely scenario to transpire. While there is no denial the magnitude and the precipitous nature of the initial plunge, however, the unprecedented monetary and fiscal policy responses should offset some of the impact and increase the probability of some pickup in activity.
This leaves us to the last option: the swoosh-shaped recovery. The initial descent confirms the first part of the shape. The popular view is that there will be a gradual pickup in economic activity as nations begin to ease the restrictions and resume businesses. However, consumption and investments will remain tepid as consumers are cautious in making discretionary purchases and businesses gauge the impact of the shutdown on the bottom line before making additional investments.
Going back to the GDP equation under the expenditure approach:
GDP = C + G + I + (X – M)
Next time you decide to eat an alphabet soup, remember all the recovery shapes you learnt!
