Academic Theory of Global Economic Recessions and their categorical shapes
The widely accepted definition of an economic recession is “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
A recession has many attributes that can occur simultaneously and includes declines in component measures of economic activity (GDP) such as consumption, investment, government spending, and net export activity. These summary measures reflect underlying drivers such as employment levels and skills, household savings rates, corporate investment decisions, interest rates, demographics, and government policies.
However, are all recessions the same? Naturally, we’re aware that anything ranging in this spectrum of vaguely defined boundaries would lead to an obvious answer in the negatives. Even after knowing that recession does not come and go in a linear pattern, we’re often overlooking its types. I will be discussing various types of Recession graphs in this blog.
V-shaped recession
The most common form of recession that is embedded in the minds of most people across the world is the V-shaped recession. During a V-shaped recession, the economy suffers a sharp but brief period of decline with a clearly defined trough, it is also usually followed by an exceptionally strong recovery. The recession of 1953 in the United States of America is a good example of a V-shaped recession, it happened due to the federal reserve expecting inflation and raising interest rates.
U-shaped recession
A U-shaped recession is longer than a V-shaped recession and has a less-clearly defined trough. Usually, the GDP shrinks for several quarters, and the process of healing from the recession is slower as well. A U-shaped recession example again coming from the United States would be the recession of 1973 — The onset of the recession came along with the 1973 oil crisis and the stock market crash of 1973–1974, resulting in one of the worst economic downturns in the history of the stock market.
W-shaped recession (double-dip recession)
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.
The European debt crisis in the early-2010s is a more recent example of a W-shaped recession. A combination of government austerity, falling business investment, rising interest rates, global economic weakness, high energy prices, and weak consumer spending after the Great Recession of 2008–2009 tipped many Eurozone countries into a second recession from 2011 to 2013.
L-shaped recession
The most severe and also the most dangerous type of recession would be the L-shaped recession. Once an economy finds itself in an L-shaped recession, it falls and continues to go down for many years, not returning back to its trend line growth, if ever. The steep decline is followed by a flat line that makes the shape of an L. This is the most severe of the different shapes of recession. Alternative terms for long periods of underperformance include “depression” and “lost decade”; compare also “malaise”.
A classic example of an L-shaped recession occurred in Japan following the bursting of the Japanese asset price bubble in 1990. From the end of World War II throughout the 1980s, Japan’s economy was growing robustly. In the late 1980s, a massive asset-price bubble developed in Japan. After the bubble burst the economy suffered from deflation, and experienced years of sluggish growth; never returning to the higher growth Japan experienced from 1950 to 1990.
The Greek recession of 2007–2016 could be considered an example of an L-shaped recession, as Greek GDP growth in 2017 was merely 1.6%. Greece technically suffered through four separate, but compounding, periods of contractions over the nine-year period.
K-shaped recession
K-shaped recessions are a tad bit different from other recessions, as they hit different sections of society differently. While one section of society suffers from a V-shaped recession, the other suffers from an L-shaped recession.
The latest COVID-19 pandemic was a live example of a K-shaped recession where central banks had used exceptional monetary tools to generate asset bubbles that protected the wealthier segments of society (i.e. asset-owning), from the financial effects of the pandemic.
Hope this was at least a bit informative, stay tuned I’ll keep writing more.
