V-Shaped Recovery: What It Is and How It Compares to Other Scenarios

V-Shaped Recoveries Explained and Compared to U, W and L-Shaped Recovery Scenarios

The COVID-19 pandemic has caused a severe global recession, affecting millions of people and businesses around the world. As the world tries to recover from the economic shock, many experts and analysts are using different letters to describe the shape and speed of the recovery. In this blog post, we will explain what a V-shaped recovery is and how it compares to other possible recovery scenarios, such as U, W and L-shaped recoveries.

What is a V-shaped recovery?

A V-shaped recovery is a type of economic recovery that resembles the letter “V” on a chart of gross domestic product (GDP) or other economic indicators. It means that the economy suffers a sharp but brief period of decline, followed by a strong and rapid rebound to its previous peak or trend. A V-shaped recovery is considered the best-case scenario for an economy after a recession, as it implies a quick adjustment and recovery of consumer demand, business investment, and employment.

An example of a V-shaped recovery is the recession of 1953 in the United States. The US economy was growing in the early 1950s, but the Federal Reserve raised interest rates to prevent inflation, tipping the economy into recession. In 1953, growth began to slow in the third quarter and the economy shrank by 2.4%. In the fourth quarter, the economy shrank by 6.2%, and in the first quarter of 1954, it shrank by 2% before returning to growth. By the fourth quarter of 1954, the economy was growing at an 8% pace, well above the trend¹.

How does a V-shaped recovery compare to other shapes?

A V-shaped recovery is not the only possible outcome for an economy after a recession. Depending on the nature and severity of the shock, as well as the policy response and other factors, the recovery can take different shapes. Here are some of the most common ones:

• U-shaped recovery: A U-shaped recovery is similar to a V-shaped recovery, except that the economy spends more time at the bottom of the recession before bouncing back. The decline and recovery are less steep and more gradual than in a V-shaped recovery. A U-shaped recovery can indicate that the economy faces structural or persistent problems that prevent a quick rebound. An example of a U-shaped recovery is the 1973-75 recession in the United States, which was caused by an oil crisis and high inflation².
• W-shaped recovery: A W-shaped recovery, also known as a double-dip recession, involves two consecutive periods of decline and growth in close succession. The economy initially recovers from the first recession, but then faces another shock or policy mistake that pushes it back into contraction. The second recession can be deeper or longer than the first one. A W-shaped recovery can be very damaging for investor confidence and consumer spending. An example of a W-shaped recovery is the early 1980s recession in the United States, which was triggered by tight monetary policy and high interest rates³.
• L-shaped recovery: An L-shaped recovery is the worst-case scenario for an economy after a recession. It means that the economy experiences a steep decline followed by a prolonged period of stagnation or low growth. The economy does not return to its previous peak or trend for years or even decades. An L-shaped recovery can result from a severe financial crisis, a debt crisis, or a structural breakdown of the economic system. An example of an L-shaped recovery is Japan’s “lost decade” in the 1990s, which was caused by a burst asset bubble and a banking crisis⁴.

What shape will the COVID-19 recovery take?

The COVID-19 pandemic has been an unprecedented shock for the global economy, causing widespread lockdowns, travel restrictions, business closures, and job losses. The International Monetary Fund (IMF) estimates that global GDP contracted by 3.3% in 2020⁵, making it one of the worst recessions in history.

However, there are signs of hope for a strong recovery in 2021 and beyond, thanks to the development and distribution of effective vaccines, as well as fiscal and monetary stimulus measures by governments and central banks around the world. The IMF projects that global GDP will grow by 6% in 2021 and 4.4% in 2022⁵, suggesting a V-shaped recovery for the world economy.

However, not all countries and regions will recover at the same pace or in the same shape. Some countries have been more successful than others in containing the virus, rolling out vaccines, and supporting their economies. Some sectors have been more resilient or adaptable than others to the pandemic-induced changes in consumer behavior and business models.

Therefore, some analysts have proposed another letter to describe the COVID-19 recovery: K-shaped⁶. A K-shaped recovery means that different parts of the economy diverge in their performance and prospects, creating winners and losers. The upper arm of the K represents the sectors and groups that benefit from the recovery, such as technology, e-commerce, health care, and high-income earners. The lower arm of the K represents the sectors and groups that suffer from the recovery, such as tourism, hospitality, retail, and low-income earners.

The K-shaped recovery highlights the uneven and unequal impact of the pandemic on the economy and society, and the need for more targeted and inclusive policies to address the challenges and opportunities ahead.

Conclusion

The shape of an economic recovery can tell us a lot about the nature and severity of a recession, as well as the speed and strength of the rebound. A V-shaped recovery is the most desirable outcome for an economy after a recession, as it implies a quick and robust return to growth. However, other shapes are possible, such as U, W, L, or K-shaped recoveries, depending on various factors and shocks. Understanding the different shapes of recovery can help us better anticipate and prepare for the future of the economy.