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W-Shaped Recovery

A form of economic recovery where the economy cycles in and out of recessionary periods, in the shape of the letter W

What is a W-Shaped Recovery?

A W-shaped recovery is a form of economic recovery where the economy cycles in and out of recessionary periods. The up and down recovery pattern is graphically represented by changes in certain economic indicators like industrial output, Gross Domestic Product (GDP), employment, etc.

 

W-Shaped Recovery

 

The W-shaped recovery is characterized by a steep decline followed by a rise in the economic indicators, and the rise is then followed by another decline, which is then topped off with a recovery. The middle section of the W is significant, as it represents a bear market or recovery from an additional economic crisis and the extent to which economic policies are used to get the economy back on track.

 

Summary

  • A W-shaped recovery is a form of economic recovery where the economy cycles in and out of recessionary periods, in the shape of the letter W. The cycle is measured by economic indicators like industrial output, gross domestic product, employment, etc.
  • The middle section of the W is significant as it represents a bear market or recovery from an additional economic crisis and the extent to which economic policies are used to get the economy back on track.
  • A W-shaped recovery is not the best form of recovery, and the government should strive to use economic policies that prevent back-to-back recessions within a period of five to ten years.

 

Understanding W-Shaped Recovery

A W-shaped recovery is a period of extreme volatility, as there are ups and downs in the recovery process compared to a V-, L-, or U-shaped recovery. The shape of the recovery graph is also known as a double-dip recession, where there is a false hope of recovery in the first cycle, and the economy crashes harder in the second cycle.

At the end of the economic recovery, the economy ends up going through the recession phase twice. Such was the case during the Covid-19 pandemic in South Asian countries like India. The Indian economy was hit hard during the first wave of the Covid-19 pandemic; the country managed to recover from it in less than a year.

However, the second wave that started in early 2021 devastated India’s economic progress. Such a double-dip recession eroded the economic progress made after the first wave. Hence, a W-shaped recovery is bad for investors and businesses that invest in the market right after the first recovery because they experience the ride down during the second recession period.

 

Historical Examples of a W-shape Recovery

The recession during the early 1980s in America was a W-shaped recovery, and according to The National Bureau of Economic Research (NBER), there were two recessions in the 1980s. The first one was between January and July of 1980, resulting in an 8% decline in GDP each month.

Then, in the first three months of 1981, the economy experienced a period of rapid growth at an annual rate of 8.4%, which caused inflationary pressure on the US dollar. The Federal Reserve under Paul Volcker raised interest rates to counteract the adverse effects of inflation, resulting in the economy being pushed back into a recession from July 1981 to November 1982. After 1982, the economy entered a period of growth for the next decade.

In the early 2010s, Europe was plagued by the debt crisis that displayed a W-shaped recovery. The economic crisis in Greece spread throughout Europe with a reduction in business investments, increases in interest rates and energy prices, and weak consumer spending. The factors tipped the economy into a second recession since the 2008 Great Recession. Countries that showed a W-shaped recovery then were Portugal, Spain, Germany, Ireland, and Cyprus.

In conclusion, a W-shaped recovery is not the best form of recovery as a double-dip recession can adversely affect individual businesses and investors, and the economy. The government should strive to use economic policies that prevent back-to-back recessions within a period of five to ten years.

An ideal form of recovery is the V-shaped or Hockey Stick recovery because the economy bounces back quickly.

 

Related Readings

CFI offers the Capital Markets & Securities Analyst (CMSA)® certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Cyclical Unemployment
  • European Sovereign Debt Crisis
  • Federal Reserve
  • U-Shaped Recovery

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