All you wanted to know about the shapes of economic recovery

Anand Kalyanaraman | Updated on June 02, 2020 Published on June 02, 2020

The rolling lockdowns due to Covid have sent the economy into a tailspin. Growth in India, and indeed much of the world, is set to fall off a cliff in FY21. Much like Ed Sheeran, who crooned: “I’m in love with the shape of you”, economic pundits now seem to be in love with prognosticating on the shape the economic recovery will take once the dust settles. Take your pick — U, V, W, Z, L, J, Swoosh, Inverted square root — there’s an economist who thinks that will be the shape to watch out for.

What is it?

What do these terms mean? The Z-shaped recovery is the most-optimistic scenario in which the economy quickly rises like a phoenix after a crash. It more than makes up for lost ground (think revenge-buying after the lockdowns are lifted) before settling back to the normal trend-line, thus forming a Z-shaped chart. The next-best scenario is a V-shaped recovery in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.

A U-shaped recovery — resembling a bathtub — is a scenario in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels. A W-shaped recovery is a dangerous creature — growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart. The double-dip depicted by a W-shaped recovery is what some economists are predicting if a second wave of Covid comes along and the initial rebound flatters to deceive. The L-shaped recovery is the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.

Then, there is the J-shaped recovery, a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.

There is also the Swoosh shaped recovery, similar to the Nike logo — in between the V-shape and the U-shape. Here, after falling, growth starts recovering quickly but then, slowed down by obstacles, moves gradually back to the trend-line.

Finally, say hello to the Inverted square root shaped recovery. Financier George Soros, who coined this term years ago, explained that while there could a rebound from the bottom, the growth slows and settles a step down.

Thus, the shape of economic recovery is determined by both the speed and direction of GDP prints. This depends on multiple factors including fiscal and monetary measures, consumer incomes and sentiment.

Why is it important?

The Indian economy was slowing down even before Covid hit, and the trouble has now been amplified manifold because of the lockdowns. Experts predict a fall of up to 5 per cent in the GDP in FY-21. This is clearly a crisis situation, and our getting out of the hole will depend a great deal on the shape of the economic recovery that will hopefully follow. A Z- or at least V-shaped recovery would be the most preferable. If not, we should at least have a U-shaped recovery or a Swoosh to get back on our feet in a couple of years.

A W-shape will bring in much pain before the eventual gain, while an L-shape or the Inverted-square root will make a wreck of the growth train.

Why should I care?

‘It’s the economy, stupid’. Your business prospects, job security, income levels, investment performance, and indeed your entire financial well-being, hinges on the economy and its prospects. The faster it recovers, the safer you are.

The bottomline

With the virus having a mind of its own, and many unknowns on the horizon, a question mark may well be the best way to describe the shape of the economic recovery today.

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Published on June 02, 2020
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