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Quick guide to economic recovery patterns

In a post-Covid world, economists around the world have begun to throw out technical jargons that might seem as if using a few alphabets out of the English language.

If you have been reading the news for a while, you might have come across terms such as the V-shape, U-shape, or L-shape being used on mainstream financial news networks. Interestingly, these are not new terms but have been there for a long time. In technical terms, these recovery patterns are referred to as recession shapes.

Economists use these patterns to describe the different types of recessions and the subsequent recoveries. Note that these are not academic but rather used as a metaphor to describe the recessions that take place.

So, what are these terms and how do the English alphabets find their way to describe an economic phase?

The first things to understand is that the alphabets represent the way economists think an economy will recover. Going by the alphabet patterns of V, U and L, one can easily get an understanding on how quickly an economic recovery will happen.

As is obvious, the V-shape recovery is the fastest recovery among the three types. This is later followed by the U-shape recovery and finally the L-shape recovery. Let's now take a closer look into each of these types of economic recoveries.

What is the V-shape recovery?

The V-shaped recovery is when an economy takes a nosedive to quickly hit rock bottom. But after this, the recovery is just as fast at the plunge. This pattern takes the shape of the letter V, which is where it gets its name from.

In the context of the Covid-19 world, the V-shape recovery emerges when there is an expectation of a temporary disruption to goods and services. This is marked by the pandemic led shutdown of businesses.

However, under this pattern, one assumes that business can quickly recover after the initial impact. But of course, the V-shape recovery is only possible if businesses were shut down for a short period of time.

What is the W-shape recovery?

The W-shape recovery is also known as a double dip recession. As the pattern suggests, there is a sharp fall initially, but this is later followed by a rebound. But the pace of the rebound is much lower, meaning that economic activity is still well below the initial shock that led to the drop. After this, we have another decline in the economic activity, marking the second dip, followed by a recovery.

In the context of the Covid-19 world, some countries are already witnessing a double dip recession. Although, we are yet to see evidence of this, we also know that while economies fell in the first quarter of the year, there was a modest rebound in the third quarter.

What’s left to be seen is how the economies will perform during the fourth quarter of the year. But this is not consistent across all economies. Therefore, there is a very good chance that we will get to see different recovery patterns in different economies.

What is the U-shape recovery?

The U-shape recovery, as the pattern shows takes a bit longer than the V-shape recovery. In a U-shape recovery, the general consensus is that the economic initially falls and continues to remain near the lows. This means that economies will experience a recession for a larger period of time.

However, eventually, one expects the economy to begin its recovery phase. The period between the initial decline and the final recovery is marked by a flat or a curved recovery pattern. This where we get the name of U-shape recovery.

In the current context, we haven’t seen evidence of a U-shape recovery just as yet. In fact, we are just near the initial phase, meaning that we will have to wait and see how the various economies will perform in the coming quarters.

What is the L-shape recovery?

The L-shape recovery, which you could guess by now shows that after an economy declines initially, it struggles to find a footing. This means that the economy will continue to remain in recession for a prolonged period of time.

This is the worst case scenario among the different economic recovery patterns. It can signal a period of deep recession in the economies.

What economic recession pattern is the world in now?

It is difficult to pinpoint the exact economic recession pattern we are in now. Furthermore, it is quite likely that different economies will witness different recession patterns. Hence, economists will more likely wait for at least another two quarters worth of GDP data before coming to a conclusion.

For the moment though, overall, there is a sense that we in the middle of a V-shape recovery. Still, a lot is left to be seen. The biggest worry is that the global economy could eventually fall into a W-shape economic recovery or a double dip recession.

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