U-Shaped Recovery
Candlefocus EditorIn a U-shaped recovery, economic activity – typically measured by GDP, output, consumption, employment, and wages – all decline for several quarters, giving the appearance of a ‘U’ on charts. U-shaped recoveries are typically more severe than V-shaped recoveries, and often result from deep structural changes, such as during a financial crisis.
Examples of U-shaped recoveries include the recession of 1973-75, also known as the Nixon recession, and the 1990-91 recession following the savings and loan crisis. Following the Wall Street crash of October 1987, the US economy took 21 months to stabilize, and this downturn was also considered a U-shape recovery.
The current recession is seen by economists to feature a U-shaped recovery. Worldwide economic activity has ground to a halt as lockdowns closed most physical businesses. As of July 2020, the IMF is expecting a 4.9% fall in global GDP this year, with US GDP expected to drop by 8%.
The recovery will depend on many factors and is likely to be a long, drawn-out process. Once lockdowns are gradually lifted, it is common for businesses and consumers to remain cautious during the recovery period, which can mean slower activity even with most of the usual economic activity on-going.
For many businesses, especially those whose revenues rely heavily on global trade and travel, it may take years before they are returned to pre-recession levels of economic activity. What will be interesting to observe is whether government stimulus measures can support the economy until it is functioning normally again.
Overall, a U-shaped recovery is one of the more severe and lengthy forms of recession and can take months, if not years, for an economy to recover. As economies rely heavily on consumer spending and sector-specific investments, a healthy and supportive environment must be created for businesses to survive and to contribute to a more sustained recovery and stronger economy in the future.