As many economies take their first steps towards reopening, there’s been lots of debate on an alphabet soup of recovery paths from v-shaped to u-shaped to Nike NKE swoosh-shaped, and more in between.
These graphs are a measure of economic performance over time. Economists use the shape of the graph as a shorthand to describe the recovery process after a crisis like a recession, financial crisis or external shock like the coronavirus.
“People have a highly vested interest to see how we’re growing,” says Todd Lowenstein, Equity Strategy Executive of The Private Bank at Union Bank. “What is the pace of growth? Is it distributed widely, where everybody’s participating?” That growth will impact policy decisions and investment decisions at every level of the economy.
Of course, economists don’t always agree on what the recovery process is likely to look like, and predictions for the outcome of the current crisis run the gamut from the bull case to the bear case.
Here are the most common economic recovery shapes and what they mean. While economic growth can be measured by any number of metrics—like the stock market or employment rates for example—we’ll focus on GDP.
A V-shaped recovery means that the economy bounces back quickly to its baseline before the crisis, with no hiccups along the way. Growth continues at the same rate as before. This is one of the most optimistic recovery patterns because it implies that the downturn did not cause any lasting damage to the economy.
Under this scenario, the economic damage lasts for a longer period of time before eventually reaching the baseline level of growth again. The economy bounces back, but the damage at the bottom lingers for a while.
Earlier this month, HSBC analysts predicted that the global economy is headed for a modified U-shaped recovery. HSBC Head of Global Foreign Exchange Strategy David Bloom told CNBC to expect multiple “false dawns” that will create a jagged bottom to the U-curve.
In a W-shaped recession, also called a double dip, the economy moves beyond a recession into a period of recovery before falling back down again into another recession. The initial recovery is sometimes known as a bear market rally.
One example: After the oil and inflation crises in 1979, the U.S. fell into two back-to-back recessions in 1980 and 1981.
A recovery scenario resembling the Nike “swoosh” logo is characterized by a steep drop and a gradual recovery, meaning that it takes much longer to return to pre-crisis growth levels than it took to fall into recession.
A variant of this is a square root-shaped recession where growth recovers but then plateaus before reaching pre-crisis levels. Lowenstein says this is his base case scenario.
This type of recovery is also very likely in the coming months, especially if the labor market fails to bounce back as quickly as it fell. According to Nestlé CEO Mark Schneider: “This is not going to be a quick recovery,” “This is going to be a several-quarter, if not several-year kind of process.”
An L-shaped recovery is the most pessimistic scenario. In this shape, the economy recovers to a certain degree from a steep drop, but growth never reaches pre-crisis levels for years, if at all. A period of economic stagnation follows.
The Brookings Institution points out that this is what the 2008 Great Recession looked like: it took six years after that crisis for GDP to return to 2007 levels, and GDP still hasn’t reached pre-recession projections more than a decade later.