Done with recession? What are the different kinds of economic recoveries?

The COVID-19 pandemic and the subsequent bouts of lockdowns imposed to counter it, triggered one of the most severe recessions in the history of the world economy.

As consumption across the globe fell drastically, so did the employment levels. The world economy was forced to witness contraction, which was probably last seen during the Great Depression of 1930s. Such was the hit on world economy that crude oil prices fell into negative territory for the first time in the history – owing to the paucity of demand.

But the governments and central banks of most countries moved fast to restore the balance in the economies. Soon, the hopelessness was replaced with talks about a V-shape recovery. Everyone seemed to celebrate the fact that there is going to be a V-shaped recovery. Some countries saw it, some didn’t.

But what is recovery?

There are four phases in any economic or business cycle – recession, trough, recovery, peak. And this cycle is often repeated. The world’s largest economy, the US, has seen five recessions in the past four decades -- the 1981–1982 recession, the one in early 1990s, another one in early 2000s, the Great Recession of 2007 and the COVID-19 Recession. Usually a recession – a phenomenon when an economy contracts for two or more quarters at stretch – is followed by a phase called recovery. It is that phase where economy is moving upwards and is in the process of reallocating resources and workers from failed businesses and investments to new jobs and uses after a recession. The overall business outlook for the economy looks optimistic during the recovery phase. This leads to increased consumption, as confidence and trust in future is re-established. As a result of increased consumption, inflation increases – a phenomenon also known as heating up of an economy.

Then what is a V-shaped recovery?

Look at the alphabet ‘V’ and place it in graph. What would it represent? A sudden drop in the variable to its lowest, followed by equally quick upward movement. That is what a V-shaped recovery means for the economy as well. In a V-shaped recovery, the economy recovers quickly and strongly after the suffering a sharp economic decline. The V-shape recoveries are generally fuelled by a significant shift in economic activity led by rapid increase in the consumer demand and business investment spending – fast improvements both on supply as well as demand side. As a result of the economy recovering very fast under this scenario, a V-shaped recovery can be considered to a sort of best-case scenario after an economy hits recession.

What are other types of recoveries?

There are countless other shapes of economic recovery, but some prominent ones include: U-shaped, W-shaped, L-shaped and K-shaped. They are:

  1. U-shaped: In a U-shaped recovery, the recession lasts longer than a V-shaped recession and its trough is not very clearly defined. The gross domestic product (GDP), in this case, may shrink for several quarters, and only slowly return to trend growth.
  2. W-shaped recovery: Considered to be a double whammy on any economy, a W-shaped recession is also known as a double-dip recession. During this, an economy falls into recession, recovers with a very short period of growth. However, this short period of growth is then followed by yet another recession before finally recovering, giving a "down up down up" pattern resembling the alphabet ‘W’.
  3. L-shaped recovery: This is one of the worst nightmares for any economy, as it is the severest of all recessions. In an L-shaped recession, an economy faces a severe and steep contraction and does not return to trend line growth for many years, if ever. This is usually when economic depression – a steep and sustained drop in the economic activity featuring high unemployment and negative GDP growth – happens. The steep drop or degrowth, is followed by a flat line that makes the shape of an ‘L’.
  4. K-shaped recovery: Also known as two-stage recession, the K-shaped recovery is a combination of the V-shaped and L-shaped recoveries. In it, parts of society experience more of a V-shaped recession, while other parts of society experience a slower, more protracted L-shaped recession. The alphabet ‘K’ in this case represents the divergent paths. Usually in a K-shaped recovery, there is lot of disruption as more and more migration happens towards the productive sectors.