Recession – Know What The Economists Mean When They Talk About Different Curves

If you’ve been following the news, one common debate you would’ve come across is that of estimating the Recovery Curve for various economies. You have different economists and financial institutions publishing various reports stating their views and expectations of how the Recovery Curve would look like for economies such as India!

Now if reading those statements leaves you feeling confused, this article is for you. We’ve decoded some of the most common recovery curve shapes and explained them for your better understanding! 

What is the Economic Recovery Curve?

In terms of an Economic Recession, a Recovery Curve gauges how long it would take for the economy to recover from the recession. 

Why Are Economic Recovery Curves Important?

It is important to understand the different types of recovery curves that the economy can experience and estimate the most likely scenario for the Country’s economy. This is because the shape of the Recovery Curve plays a huge role in determining how the Government would restart the economy.

Understanding the Different Recovery Curves:

  • A V-Shaped Recovery Curve:

A V-Shaped Recovery Curve is one that takes the form of the alphabet, ”V” when certain economic factors are plotted on a graph. It suggests that the economy will bounce back from the recession bottom very quickly. A V-Shaped Recovery Curve is found when the economy experiences a sharp decline followed by a quick recovery. 

An example of a V-Shaped Recovery Curve would be the 1953 recession.

  • A U-Shaped Recovery Curve:

A U-Shaped Recovery Curve is one that takes the form of the alphabet, ”U” when certain economic factors are plotted on a graph. It suggests that the pre-recession peak of an economy will be achieved again but not as rapidly as in a V-Shaped Curve. The economy is expected to spend some time (a few quarters) at the bottom of the recessionary performance before it begins moving back towards a pre-recession level. 

Examples of a U-Shaped Recovery Curve include the 1973 Nixon Recession and the 1990-91 Recession that followed the S&L Crisis.

  • An L-Shaped Recovery Curve:

An L-Shaped Recovery Curve is one that takes the form of the alphabet, ”L” when certain economic factors are plotted on a graph. The L-Shaped Curve is extremely dangerous for an economy and an L-Shaped Recession is often also referred to as an “Economic Depression”. In an L-Shaped Curve, the economy is expected to experience a very slow recovery rate, stagnant growth, and high levels of unemployment for an elongated period of time and the economy may sometimes take years to recover. 

An example of an L-Shaped Recovery Curve would be “The Great Depression” of 1929.

The Key Differentiator:

Having understood what the various economic recovery curves can look like, you can now be clear in your understanding of the Curves. An economic recovery curve is used to understand how quickly an economy or a company can bounce back from a recessionary period. The focus, when determining the shape of the recovery curve, is on how long the economy stays at the bottom of the recessionary period before it begins its growth again.