Economic recovery has become the buzzword as hopes of vaccine sprout across the globe. If plotted on a graph, economic recovery (GDP numbers generally) form certain shapes which denote the pattern of recovery of an economy. Let’s take a look at the different shapes and understand what they mean.
Crux of the Matter
Understanding Economic Recovery And Its Different Shapes
Economic recovery is the ultimate goal of all the world economies in today’s troubled times. Simply put, it is the business cycle stage following a recession that is characterized by a sustained period of improving business activity. Normally, during an economic recovery, GDP grows, incomes rise, and unemployment falls as the economy rebounds.
Shapes of recovery are the patterns formed on the graphs which denote a shape of recovery of an economy which can usually be U, V, W, Z, L, K.
V Shaped Recovery
Generally happening within a span of 1 year, V-shaped recovery marks the shortest recovery of the economy among all other shapes.
A look at the Indian economy during the Covid-19 period suggest that the sharp fall in GDP in July could be the bottom after which the economy is rebounding. This shape is seen in India’s GDP recovery.
Read more about it here: What Do Latest GDP Numbers For India Say?
Shots For V Shaped Recovery
Several measures have been taken and are ongoing to support India’s V-shaped recovery:
– Indian government announced stimulus packages, and incentive-based production schemes to bolster production and become an exporting nation.
– RBI has maintained interest rate level and also carried out Open Market Operations to maintain liquidity in the economy.
– RBI has also maintained the value of the Rupee reportedly to tame inflation and balance import-exports.
L Shaped Recovery
This is characterized by persistent unemployment, and lower growth – sometimes it depicts that the economy never fully recovers. They generally occur post economic recession.
The Great Depression of 1929 in the USA is a classic example of the L shaped recovery, as the unemployment reached 25% and the stock prices fell 22% causing investors to lose $30 billion (equivalent to $396 billion today).
Causes Of 1929 Depression
- Federal Reserve increased interest rates.
- Speculators began trading in their dollars for gold.
- Fed raised interest rates again to preserve dollar.
- To combat deflation, the Fed did not increase the money supply.
How Did The Depression End?
Franklin Roosevelt, then new US President, promised jobs, allowed unionization, and provided unemployment insurance. In his lifetime, he created 42 new agencies, and the Fed also increased its debt.
W Shaped Recovery
An economy goes into recession, rises from it to a certain level, sometimes above the pre-recession levels and then again falls into recession, post which it finally recovers. If one looks from the stock markets’ perspective, the falls of 2000-01 and 2007-08 are the best examples of this shape.
K Shaped Recovery
This phenomenon occurs when different sectors of the economy recover at different times post the recession. Sectors like IT, FMCG, Pharma, & Cement are growing well post the lockdown. E-Commerce too registered a growth of 17% post lockdown. Whereas, sectors like Tourism, Hospitality, Cinema, Airlines (barring cargo to some extent) are posting a slow recovery.
Taking this into consideration, economic recovery in India could look more like a K-shaped recovery when sectors
Z Shaped Recovery
This recovery is of a bullish style, in which the economy is highly optimistic and quickly rises after an economic crash is termed to be a Z shaped recovery. It gifts the economy more than what had been taken away due to an economic crash. Although it lasts for a shorter time period, it restricts the purchasing power of the consumer rather than affecting their income.
U Shaped Recovery
U shaped recovery is when the economy wanders for a little while in the economic crash state such as depression. After the downfall, it recovers slowly and the map forms a U shaped structure.
Summachar brings you this story in collaboration with Finmedium that can be found on Instagram at @finmedium and on the web here.
- George Soros is a billionaire investor and philanthropist. During the 2009 recession, he said that the recession could follow an “inverted square root sign”-shaped recession. Soros explained that: “You hit bottom and you automatically rebound some (i.e. a spike), but then you don’t come out of it in a V-shape recovery or anything like that. You settle down – step down”.
- During the coronavirus pandemic, several commentators used the shape of a normal square root to describe a situation where the recovery would not be complete, but after an initial rise, would flatline for a period.
- A Manhattan plot/graph is a type of scatter plot, usually used to display data with a large number of data-points and with a distribution of higher-magnitude values. It gains its name from the similarity of such a plot to the Manhattan skyline: a profile of skyscrapers towering above the lower level “buildings”.
- The Print – Indian economy is heading for a K-shaped recovery and it won’t be a pretty sight
- Investopedia – V-Shaped Recovery
- Business Standard – India wants a V-shaped recovery at any cost. But what will RBI do?
- The Balance – The Great Depression, What Happened, What Caused It, How It Ended
- The Balance – The Great Recession of 2008 Explained With Dates