U, V, W, L, Z or swoosh? Various shapes of economic recovery explained

These recoveries take their names from the approximate shape the economic data will make when seen on a graph and can indicate the time a country might take to come out of a recession.

Hyderabad: Last week, India’s expenditure secretary T.V Somanathan said the central government is optimistic about the economy’s trajectory of recovery and expects a V-shaped recovery. “This year being at the bottom of the V, and the next year being closer to the top of the V,” he said.

A research report in June highlighted how the shape of India’s economic recovery is more likely to be a ‘U’ or ‘W’ rather than a ‘V’ as the impact of Covid-19 will be profound on a country that was already struggling for growth prior to the pandemic.

Meanwhile, Bank of America is warning the US that fresh coronavirus outbreaks across the nation are turning its early V-shaped bounce into a W- or L-shaped economic slump.

After the world slipped into recession post the outbreak of the coronavirus pandemic, discussions have intensified over the possible shape the economic recovery process will take. Economists are commonly using terms like U-, V- or W-shaped recovery as shorthand to explain the time a country might take to recover.

There are broadly six shapes of recoveries – L, U, V, W, Z and swoosh. They basically take their names from the approximate shape the economic data will make when seen on a graph. Here’s a detailed look at what these various shapes of recovery signify.

V-shaped recovery

V-shaped recovery

A V-shaped recovery basically indicates that after suffering a sharp economic decline, the economy quickly and strongly recovers, managing to achieve the previous peak. The trough, or the low point, in this case is clearly defined and does not last long. A V-shaped recovery is considered to the best-case scenario in the situation of a recession as it indicates that the downfall was temporary and did not do any permanent damage to the economy.

U-shaped recovery

U-shaped recovery

A U-shaped recovery is similar to a V-shaped one in terms of the extent of economic recovery, but the pace is more gradual and covers a longer period of time. The U-shaped recovery has a less-clearly defined trough. So, in this scenario, the economic damage can last much longer.

W-shaped recovery

W-shaped recovery

W-shaped recovery is also known as ‘double-dip’ recession or ‘double-dip’ recovery. In this case, the economy sinks into a recession and then recovers briefly before slipping into another recession and then recovering finally. This gives ‘a down-up, down-up’ pattern resembling a W.

L-shaped recovery

L-shaped recovery

This is the most severe form of recession and not really a recovery. In this scenario, the country suffers a steep economic decline and does not return to pre-crisis growth for several years, indicating prolonged damage to the economy.

Z-shaped recovery

Z-shaped recovery

Z-shaped is the most optimistic form of recovery, probably even better than V-shaped one. In this scenario, the economy suffers a downturn, but then bounces back up even above the pre-crisis levels due to pent-up demand that creates a temporary boom before settling down at the baseline growth.

Swoosh-shaped recovery

Swoosh-shaped recovery

In the case of Swoosh-shaped recovery, that resembles Nike’s logo, a sharp decline with a clear low point is followed by a small partial bounce and then a long gradual recovery, indicating that the economy is taking its own time to get back to pre-crisis trajectory.

Does economic recovery really follow shapes and patterns?

Speaking to ETV Bharat, former finance secretary Subhash Chandra Garg said: “Real economies, after disruptions, recover based on demand and supply dynamics. U, V, etc. shapes provide only visual understanding of the recovery path with reference to the points of beginning and end of disruption.”

Garg also said that predicting the accurate path of recovery is difficult but not impossible if one takes into account important policy actions.

So what kind of recovery can India see? “I expect Indian economy to contract by about 10% in 2020-21, and see a U-shaped recovery in 2021-22 referenced to 2019-20,” Garg said.

(ETV Bharat Report)