Alphabetical Recovery of the Economy

Covid-19 startled the world with its ferocity, spreading viral contagion and economic chaos at an accelerating pace. Measures taken by countries all over the world to control COVID have resulted in various economic consequences. Even one of the world’s strongest economy i.e. the USA couldn’t survive the tide of the pandemic. On 8th June, The National Bureau of Economic Research (NBER) declared that in February the US economy went into recession. This marks the first U.S. recession since the Great Recession, which began in December 2007 and lasted until June 2009. Soon central bank and government all over the world bucked up to save the economy from going to the worst. The government pumped up the economy with trillions of dollars, helping small businesses, unemployed people to cope up with the crisis. Fed Bank also deployed all the tools they have to keep the inflation rate low and keeping dollar value strong.

All these measures helped the economy to take a U-turn and move towards recovery. Economic recovery is when an economy is bouncing back from a recession and starting to expand again. Economies move in phases and, once they have contracted and fallen into a recession, they eventually enter a stage of recovery before starting the cycle again. There has been a lot of speculation going on about what the economic recovery will look like. And it sounds like we are hearing an alphabet song. So, let’s check out the possibilities of the shapes of economic recovery:

1. L-Shaped Recovery — In an L- shaped recovery, the recovery rate slows down with persistent unemployment and growth stagnant over many years. The two major L-shaped recovery examples are the Great Depression of the 1930s and the lost decade in Japan.

In the early 1990s, Japan’s GDP growth declined substantially then remained low for many years. This prolonged recession is sometimes described as Japan’s “Lost Decade”. The country had seen solid economic growth from the years immediately after World War Two until the end of the 1980s. That led to what turned out to be a massive over-pricing of assets or “bubble”. Since that bubble burst in the early 1990s Japan has continued to experience weak growth and has yet to return to the pace of expansion seen from 1950 to 1990.

2. W-shaped recovery — A W-shaped recovery has two economic recessions and recoveries. There are two peaks and two troughs. When you read the term double-dip recession, it means the same as W-shaped recovery.

An example of a W-shaped recovery is the recession of the 1980s in the USA. It was the most severe recession since WW2. The first downtrend started in early 1980 due to the 1979 energy crisis. The US economy came out of recession in 1981. Its central bank, the Federal Reserve, subsequently raised interest rates to control inflation. However, that measure triggered another slowdown in the economy from July’81 to November’82.

3.V-Shape — In a “V-shaped” recession, the economy declines then recovers rapidly resulting in a small time. This is one of the most bullish recovery patterns because it implies that the downturn did not cause any lasting damage to the economy.

An example of V-Shaped recovery is the Recession of 1953. It began in the second quarter of 1953 and lasted until the first quarter of 1954.

4. U-Shape — A “U-shaped” recovery is represented by many quarters of negative growth before recovering.

America had a U-shaped recovery in the early to mid-1970s. At the start of 1973, the US economy began to contract sharply and continued to have very low growth for almost two years. It only returned to its previous rate of expansion in 1975.

5. K-Shaped recovery — It would be one where growth continues but is uneven, split between sectors and income groups. Under this recovery, wealthier Americans do well but poorer Americans remain stuck in recession.

We can notice this pattern in the stock market these days. Firstly, the economy is doing so bad i.e. GDP plunged at its most ever at an annualized rate, the unemployment rate is highest, bankruptcy rates are high yet the stock market is at an all-time high. Secondly, tech stocks are skyrocketing, whereas other sectors (airlines, energy, shopping malls, offices, hospitality, etc.) stocks are falling or remains stagnant.

6. Z-shaped recovery: It is the most optimistic scenario in which the economy quickly rises after an economic crash.

  1. It makes up more than for lost ground before settling back to the normal trend-line, thus forming a Z-shaped chart.
  2. In this economic disruption lasts for a small period wherein more than people’s incomes, it is their ability to spend is restricted.

7. Nike Swoosh recovery: Under this recovery, the economy will fall sharply but will slowly recover.

From my perspective, the economy will recover in multiple shapes. Fed has already used all of its monetary policy instruments, in the beginning, to protect the economy from going to depression. Fed’s Powell urges more federal stimulus to help the economy recover from coronavirus pandemic. In a speech to the National Association for Business Economics, he said “Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth.”

The government has already passed one stimulus package which provided temporary relief. People are looking forward to the second stimulus in the months ahead. Even though people will receive a second round of checks, they will save the money for an unforeseeable future. Thus, money circulation will decrease, and the economy will experience a slow recovery.

Many small businesses will not reopen, putting unskilled and semi-skilled workers out of jobs for the foreseeable future. Furloughed employees also will not go back to work as fast as they were laid off, sustaining high unemployment levels. The policies laid out by Fed have directly or indirectly benefitted big businesses like purchasing massive amounts of securities to support financial markets, slashing interest rates to near-zero, and establishing direct-lending programs to major corporate employers, among other things.

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