The Shapes of Recovery for an Economy

Read Time: 5 mins

Now we have all seen the turmoil which the coronavirus has created for all of us. We have been seated all the while, seeing our economy shrinking, countries such as Germany and South Korea entering a state of recession because of COVID dragging down their exports, the death rates escalating, the desperation to get nominal healthcare facilities, and much more! 

Talking about the stock markets, Dow Jones IA, FTSE 100, NIFTY all plunged by 40%,35%, and 38% respectively. Now we know that the race for the vaccine is ongoing and when will these unprecedented time end, we have no clue. Will we see a second wave? Will the vaccine work as the virus is a mutant? We have no idea but what we know is that the economy is recovering! So let's have a look at how economies usually recover!

This is not the first time the economy has shrunken by this much, we have seen worst in the past and have recovered from it and so we will from this pandemic. During the Great Depression1929, we faced a staggering loss of 89.2% in the market value, it took the US/DJIA 20 years to gain back similar momentum as that of before the crash. So all crashes are different and so are the recoveries from these crashes. The recovery depends on a lot of factors such as how the Manufacturing demands get back to normal, how the agricultural feed is being produced. 

In short, In a recession what happens in that the demand decreases thus the supply/production decreases this leads to less demand in the workforce, companies start firing employees, the average buying power of the population decreases which leads to a further decrease in demand of goods and then that further leads to less supply/production which in turn leads to more job losses. This loop continues and we enter a state of recession. 

So how do we usually recover from a recession? How many years will we take to recover from this pandemic? 

Before answering the latter, let's see how do we usually recover from a recession. For the recovery, we need the market indices to get back to their normal price points and there are types of shapes that are formed by the graph of an economy that is recovering.

We have defined these shapes in 4 categories which are easily understood from their names, which are as follows:

• V-shaped
• In a V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. V-shapes are the normal shape for a recession, as the strength of the economic recovery is typically closely related to the severity of the preceding recession.
• Ex: Recession of 1953 in the US

• U-shaped
• A U-shaped recession is longer than a V-shaped recession and has a less-clearly defined trough. GDP may shrink for several quarters, and only slowly return to trend growth.
• Ex: The 1973–75 recession in the United States

• W-shaped
• In a W-shaped recession, (also known as a double-dip recession), the economy falls into recession, recovers with a short period of growth, then falls back into recession before finally recovering, giving a "down up down up" pattern resembling the letter W.
• Ex: The early 1980s recession in the United States

• L-shaped
• An L-shaped recession or depression occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. The steep drop or degrowth is followed by a flat line that makes the shape of an L.
• Ex: The Japanese asset price bubble led to a Lost Decade in Japan

Now we know what all shapes a recession can take, so let's see what shape will this virus lead us to. As no one can predict the future so all we are doing here is making an educated guess rather than just being indolent and ignorant of the fact that the economy has shrunken.

Based on multiple factors, with many are out of scope for this blog, we can predict that the 2 shapes that we might see are V & U. L is definitely not going to happen as there is no bubble because of which the economy is shrunken and for a W shape, even if we face a second wave(as many people are predicting), we have learnt how to deal with this, people have already adjusted to work from home culture, have adapted to not going out, and much more, so a second drop in the market value by 30-40% seems unlikely.

Also, we are more inclined to see a U shape rather than a V shape because the virus has affected us in a lot of ways, not just physically but mentally. Even if the shopping centres open, we will resist ourselves for going out,  we will restrain ourselves from eating outside, this virus has also completely damaged the supply belt and to get things back to normal, we need a foolproof vaccine and even if we get a vaccine in September(earliest), the production and distribution will take a lot of time, so we will recover from this plunged market but it'll be a slow recovery and we might need a year or 2(at the very least) to get back to normal.

So prepare yourselves accordingly and make you action plans to fight this virus inside-out.