W-Shaped Recovery

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What Is a W-Shaped Recovery?

A W-shaped recovery is an economic cycle of recession and economic recovery that resembles the letter 'W' in the charting.

The W represents the shape of the chart of certain economic measures such as industrial output, employment, gross domestic product (GDP), and others.

A W-shaped recession symbolizes the period of recession and recovery in an economy. It is also known as a double-dip recession.

The economy falls into recession, then recovers with a short period of growth. Then, it falls back into recession before the economy finally recovers, giving a "down up down up" pattern that matches with the letter 'W.'

The chart's middle section of the "W" is significant as it represents a bear market rally or a recovery stifled by an additional economic crisis. It shows the extent to which the economy got back on track due to factors like economic policy.

The W-shape in the chart is a symbolic representation of the economy.

W-shaped recessions are generally painful and scary because the brief recovery in the economy can trick investors into investing too early, creating further losses.

This is not the best recovery form; therefore, the government should strive to use economic policies to prevent back-to-back recessions within five to ten years.

This recovery is a period of extreme volatility, as there are many ups and downs compared to the V-, U-, or L- shaped recovery. There is a false hope of recovery in the first cycle, and the economy crashes hard in the second cycle.

There are other recession and recovery chart shapes, such as L-shaped, U-shaped, V-shaped, and J-shaped. Each of these shapes represents the general shape of the chart of economic metrics that gauge economic health.

According to many analysts, such recovery duly represented the economic recession of 1981.

In the 1980s, the United States experienced a W-shaped recovery. First, the United States economy faced the first recession from January to July 1980. Then the economy recovered for at least a full year before dropping into the second recession from 1981 to 1982.

The economic chart considers employment rate, labor, gross domestic product (GDP), productivity, and industrial output, among others.

Another case of such a recovery is the COVID-19 pandemic in South Asian countries such as India.

The economy crashed during the first wave of the COVID-19 pandemic, but the country recovered in less than a year.

However, India's economic progress was again devastated by the second wave of the Covid-19 pandemic that began in 2021. This double-dip recession completely eroded the economic progress that India had made after the first wave.

Key Takeaways

A W-shaped recovery is an economic recovery pattern characterized by a rapid decline in economic activity, followed by a short-lived recovery, then another downturn, and finally, a sustained recovery.
W-shaped recoveries can create volatility in financial markets. Investors may experience uncertainty and fluctuating asset prices due to the unpredictable nature of the economic trajectory.
Instances of W-shaped recoveries include the economic conditions during certain periods of the Great Depression and the double-dip recession in the early 1980s in the United States.
Policymakers must monitor economic indicators and take responsive measures to support the economy during downturns. This may include fiscal stimulus, monetary easing, and structural reforms to address root causes of economic weakness.

W-Shaped Recovery vs. Other Shapes

Now that such a recovery has been covered, we can look at how it compares to other recoveries. The other main variations of economic recovery are the L-shaped, U-shaped, and V-shaped recoveries.

W-Shaped Recovery Vs. V-Shaped Recovery

The following are the differences between the W-shaped and V-shaped recovery types:

A V-shaped economic recession defines the shape of the market performance.
This type of recession is denoted by a sharp decline followed by a speedy and strong recovery. This is very different from the W-shaped recovery.
After a recession has occurred, a V-shaped recovery is always considered the best-case scenario.
A V-shaped recovery refers to the movement of stocks in the market and the overall market performance.
It represents short-lived recessions before a turnaround takes place in the market.
The two most important recessions in history considered V-shaped are 1920 to 1921 and 1953 to 1954.
Most recessions or recovery cycles before the Great Depression and fiscal and monetary policy discoveries are V-shaped.

W-Shaped Recovery Vs. U-Shaped Recovery

The following are the differences between the W-shaped and U-shaped recovery types:

A U-shaped recovery is visualized in the charts as the letter' U.' Unlike the V-shaped recovery, it starts with a more gradual drop. Then, after hitting rock bottom, it stays there for some time before returning to recovery.
The normal period of a U-shaped recovery runs anywhere between 12 to 24 months.

An example of a U-shaped recovery is the one between 1990 and 1991. Then, the job markets were stuck in recession, but the gross domestic product (GDP) bounced back quickly.

W-Shaped Recovery Vs. L-Shaped Recovery

The following are the differences between the W-shaped and L-shaped recovery types:

An L-shaped recovery is the worst and most dramatic type of recovery. It is characterized by a sharp and steep decline in economic activity, followed by a very slow recovery period - a decade or more.
The L-shaped recovery is seen during depressions where it takes longer to recover.

Japan faced such a recession in the 1990s after the central banks raised interest rates because of concerns over large asset bubbles in the stock market and real estate. As a result, economic growth plummeted, the bubbles burst, and debt deflation rose after rates were raised.

This period is called the lost decade, as it took the country over ten years to recover from the crash.

W-Shaped recovery Examples

The recession in America during the early 1980s was considered a W-shaped recovery since, according to the National Bureau of Economic Research (NBER), there were two recessions in the 1980s.

The first recession was between January and July of 1980, which resulted in an 8% decline in the gross domestic product (GDP) from April to June 1980.

Then, during the first three months of 1981, the economy experienced a phase of sharp growth at an annual rate of 8.4% resulting in inflationary pressure on the US dollar.

The Federal Reserve raised the interest rates under Paul Volcker to counteract the adverse effects of inflation, which resulted in the economy being pushed back into a recession from July 1981 to November 1982.

The economy entered a period of growth for the next decade after 1982.

Europe was plagued by a debt crisis in the early 2010s, and its recovery is also considered W-shaped. The economic crisis in Greece spread throughout Europe with a reduction in business investments, a rise in interest rates and prices, and a decrease in consumer spending.

The economy ultimately dipped into a second recession, with both dips caused by the effects of the 2008 Great Recession.

Portugal, Spain, Ireland, Germany, and Cyprus were the countries that showed the most distinct recovery.

In conclusion, a W-shaped recovery is not a great form of recovery, as a double-dip recession can adversely affect investors, businesses, and the economy.