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W-Shaped Recovery

We’re all familiar with the general shape of the business cycle and how it moves up and down to indicate how an economy is performing over time. Low points mark a recession, while the higher points signal expanded growth. But it’s not always smooth sailing. There can be sudden dips and, occasionally, the dreaded W-shaped recession.

A W-shaped recovery, sometimes known as a ‘double-dip recession’, is when an economy passes through a recession into recovery and then immediately turns down into another recession. While the economy may still be showing signs of growth, the contraction marks a second major dip, indicating a slowing in the recovery process.

When graphed, the shape usually reveals two distinct dips and a flat line, showing the period of stagnancy between them. This is distinct from a V-shaped recession, which rises and falls to form an acute angle, or a U-shaped recession, which resembles a bowl, with the lowest point sitting in the middle.

W-shaped recessions can be particularly painful because the brief recovery that occurs can fool investors into getting back in too early. Unfortunately, if the economy takes another downward turn, the investors can suffer significant losses when the economy faces a second contraction.

When a W-shaped recession does happen, governments may enact policies, such as fiscal or monetary policy, to help natural forces begin to reverse the economy's downturn. For example, governments may increase taxes, or lower interest rates to encourage investment, or cut spending.

Regardless of how it is managed, a W-shaped recession can have long-lasting and far-reaching consequences. It affects businesses and individuals in many ways, cutting into wages and prolonging unemployment. It hurts government revenues, leading to budget deficits and an inability to invest in growing the ecnonomy. This can leave many businesses and households worse off than before the recession, exacerbating pre-existing social and economic disparities.

A W-shaped recession is an unpredictable yet very real occurrence and understanding the intricacies of the business cycle is key to navigating these complex times. Whether governments and businesses can successfully implement strategies to have a recovering economy, or if the economy will continue to suffer through a second recession, remains to be seen.

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