Types of Economic Recovery

Economic recovery can take many forms, which is depicted using alphabetic notations. For example V-shaped recovery, U-shaped recovery, elongated U-shaped recovery, W-shaped recovery and L-shaped recovery.

The fundamental difference between the different kinds of recovery is the time taken for economic activity to normalize.

In this article, let’s try to take a brief look how L, V, U & W Shaped economic recovery compare.

L Shaped Recovery

An Lshaped recovery is a type of recovery characterized by a slow rate of recovery, with persistent unemployment and stagnant economic growth. L-shaped recoveries occur following an economic recession characterized by a more-or-less steep decline in the economy, but without a correspondingly steep recovery.

Example – Lost decade in Japan
What is known as the lost decade in Japan is widely considered to be an example of an L-shaped recovery. Leading up to the 1990s, Japan was experiencing remarkable economic growth. In the 1980s, the country ranked first for gross national production per capita. During this time, real estate and stock market prices were quickly rising. Concerned about an asset price bubble, the Bank of Japan raised interest rates in 1989. A stock market crash followed, and annual economic growth slowed from 3.89 percent to an average of 1.14 percent between 1991 to 2003. 

V Shaped Recovery

In a Vshaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. V-shapes are the normal shape for recession, as the strength of economic recovery is typically closely related to the severity of the preceding recession

Example – The Recession of 1953

The recession of 1953 in the United States is another clear example of a V-shaped recovery. This recession was relatively brief, and mild with only a 2.2% decline in GDP and unemployment rate of 6.1%.  Growth began to slow in the third quarter of 1953, but by the fourth quarter of 1954 was back at a pace well above the trend. Therefore, the chart for this recession and recovery would represent a V-shape.

U Shaped Recovery

Ushaped recovery describes a type of economic recession and recovery that charts a U shape, established when certain metrics, such as employment, GDP, and industrial output sharply decline and then remain depressed typically over a period of 12 to 24 months before they bounce back again.

W Shaped Recovery

A W-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back upward, followed again by a sharp decline and ending with another sharp rise. The middle section of the W can represent a significant bear market rally or a recovery that was stifled by an additional economic crisis.

Example – US economy in 1980’s

The United States experienced a W-shaped recovery in the early 1980s. From January to July 1980 the U.S. economy experienced the initial recession, and then entered recovery for almost a full year before dropping into a second recession in 1981 to 1982. 

Summing Up :

While the different scenarios give some guidance on the economic impact & recovery of Covid-19, but in these times, it’s more difficult than ever to come up with adequate economic forecasts. The best we can do is to describe several possible outcomes, based on different scenarios regarding the length of the lockdown and the spread of the virus.

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