The Different Recession Shapes Explained: V, W, U, L | Economics Channel

The recession. One of the most feared elements in economics. It can lead to many negative things such as an increase in the cost of living, the loss of millions of jobs, investments that collapse and life savings that suddenly disappear. But what types of recession exist and what are their characteristics? To classify them economists use the Recession shapes. However, there is no specific academic theory or classification system for recession shapes; rather the terminology is used as an informal shorthand to characterize recessions and their recoveries.

The most commonly used terms are:

• V-shaped
• U-shaped
• W-shaped
• L-shaped

The shapes take their names from the approximate shape economic data make in graphs during recessions.

Let’s start with the V-shaped recession

V-Shaped Recessions

Imagine the left side of the letter V representing an economy falling into recession, while the right side represents its quick recovery so the V-shaped recessions are recessions that begin with a steep fall but then quickly find a bottom, turn back around and move immediately higher. A V-shaped recession is a best-case scenario because it is “sharp and quick”.

A clear example of a V-shaped recession is the Recession of 1953 in the United States. In the early 1950s the economy in the United States was booming, with grow averaging 13% in 1950 and 6% in 1951, but because the Federal Reserve expected inflation it raised interest rates, tipping the economy into recession. In 1953 growth began to slow, in the third quarter, the economy shrank by 2.4 percent. In the fourth quarter the economy shrank by 6.2 percent, and in the first quarter of 1954 it shrank by 2 percent before returning to growth. By the fourth quarter of 1954, the economy was growing at an 8 percent pace, well above the trend. Thus GDP growth for this recession forms a classic v-shape.

W-Shaped Recessions

W-shaped recessions are recessions that begin like V-shaped recessions but then end up turning back down again after showing false signs of recovery. W-shaped recessions are also called “double-dip recessions” because the economy drops twice before a full recovery is achieved.A W-shaped recession is painful because many investors who jump back into the markets after they believe the economy has found a bottom end up getting burned twice—once on the way down and then once again after the false recovery.

The European debt crisis in the early-2010s is a 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. Countries affected included Italy, Spain, Portugal, France, Ireland, Germany, and Cyprus.

Greece, while part of the Eurozone, saw continuous economic contraction from 2007 to 2015, and thus does not fit the definition of a W-shaped recession, but rather an L-shaped recession.

U-Shaped Recessions

U-shaped recessions are recessions that begin with a slightly slower decline but then remain at the bottom for an extended period of time before turning around and moving higher again. A U-shaped recession is longer than a V-shaped recession, and has a less-clearly defined trough. GDP may shrink for several quarters, and only slowly return to trend growth.

The UK crisis was a consequence of the world financial crisis of 2007–08 and lasted for five quarters becoming the deepest UK recession since the Second World War.
There was much speculation of a ‘double dip’ recession during the 2010s, but this proved not to be the case, unlike many other EU country which, as we have seen, fell in a second recession. However, the 2010s saw some separate periods of Quarter on Quarter fall in growth but they were all isolated cases of a tiny GDP fall always preceded and followed by growth.

L-Shaped Recessions

An L-shaped recession occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. It is important to underline that it is taken into account whether the economy grows above, equal to or below the historical growth trend and not if the growth is merely negative or positive.

This is the most severe of the different shapes of recession and is the worst-case scenario because it is very difficult to return to the trend growth and requires many years to recover.

The Greek recession of 2007–2019 could be considered an example of an L-shaped recession, as Greece technically suffered through four separate,but compounding, periods of contractions over the period and never returned to the trend growth so far. The Greek crisis was triggered by the aftermath of the world-wide Great Recession, structural weaknesses in the Greek economy, and lack of monetary policy flexibility as a member of the Eurozone The crisis included revelations that previous data on government debt levels and deficits had been underreported by the Greek government. In 2010, Greece said it might default on its debt. To avoid default, the EU loaned Greece enough to continue making payments. Since the debt crisis began in 2010, the various European authorities and private investors have loaned Greece nearly 320 billion euros. It was the biggest financial rescue of a bankrupt country in history. As of January 2019, Greece has only repaid 41.6 billion euros. It has scheduled debt payments beyond 2060. In return for the loan, the EU required Greece to adopt austerity measures that, however, had disastrous consequences for the Greek economy (and not only). In all, the Greek economy suffered the longest recession of any advanced capitalist economy to date, overtaking the US Great Depression and has not yet managed to return to the trend growth levels.

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