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What Shape Is Your Recession?
The alphabet soup of economic misery.
What it means: We’re on the way back up. The most optimistic scenario for global recovery, V-shaped recessions only last for a few months before economic growth accelerates sharply again.
Precedent: The 1997 Asian financial crisis, triggered by the revaluation of the Thai baht, saw a deep slowdown and a quick rise thanks largely to multibillion-dollar loans by the International Monetary Fund.
Who’s predicting it? The most recent U.S. recession technically started toward the end of 2007 and ended in June 2009. Nonetheless, some influential voices continue to predict a rapid upturn. Hedge-fund investor John Paulson, whose bearish investments paid off during the initial crash, told reporters in April that the “economy is showing strong signs of a recovery” and that he expected it to keep moving up. Analysts at Barclays Capital also predicted in August that a V-shape would prevail, based on the strength of corporate earnings and the capacity of central banks.
What it means: We’re still in a hole. A U-shaped recession, in which growth remains stagnant for a long time before slowly returning, is a more negative appraisal of the current recovery.
Precedent: The U.S. economic “malaise” of 1973 to 1975, in which high unemployment and high inflation were exacerbated by an oil-supply crisis.
Who’s predicting it: Former IMF chief economist Simon Johnson compared this type of recession to a bathtub: “You go in. You stay in. The sides are slippery. You know, maybe there’s some bumpy stuff in the bottom, but you don’t come out of the bathtub for a long time.” Goldman Sachs’s economic research team, unswayed by the growth numbers of early 2010, thinks that tightened lending conditions mean that the recovery will remain sluggish and we’re still tracing the bottom of the U. Former Federal Reserve Chairman Alan Greenspan has also thrown in his lot with the U crowd, foreseeing the recovery as a “slow, trudging thing.”
What it means: It’s going to get worse again before it gets better. More commonly known as the dreaded “double dip,” economies in a W-shaped recession recover quickly from an initial shock, only to crash again.
Precedent: Many economists think the Great Depression was actually two separate downturns, one from 1929 to 1933 and a second from 1937 to 1938, caused by premature fiscal tightening and persisting until World War II gave a boost to U.S. industry.
Who’s predicting it: Nobel Prize-winning economist and New York Times columnist Paul Krugman is a noted “double dipper,” arguing that government measures to boost economic recovery, such as the $1.1 trillion in stimulus spending pledged by G-20 countries, have been insufficient. Harvard University economist Martin Feldstein, who battled the 1980s double-dip recession as President Ronald Reagan’s chief economic advisor, also thinks we’re likely headed for a second downturn, saying in 2009, “I think we’re going to see a temporary substantial improvement. I emphasize the words temporary and substantial.”
What it means: The “Bloody L” is the worst-case scenario: The economy essentially falls off a cliff and growth remains stagnant for years.
Precedent: Japan’s “lost decade” of the 1990s, which followed the bursting of the Tokyo stock-market bubble after years of rapid growth.
Who’s predicting it: Dartmouth economist David Blanchflower warns of an L-shaped global recession if more stimulus measures aren’t taken promptly. “That could result in … even [an] L-shaped recovery, given that the private sector seems to be on its back,” he wrote last year. An increasing number of economists are now predicting a long and painful L-shaped trajectory for European countries, which have less control over their monetary policies and labor markets, even as they cautiously note that Asia and the United States might be turning back from the bottom.