Thursday, September 10, 2009

L,V,U OR W-SHAPED RECOVERY?

Will the most common word spoken, dreamt, dreaded, discussed, analysed, lived-“recession” will be out of people’s dictionary or stay for a long period before we could see some change in the economy and hear the most awaited word ”recovery”?

Recession is defined as “two consecutive quarters of negative growth”. The world economy entered into deep recession in the last quarter of 2008. The global trade and the industrial production saw its sharpest decline in the post world war era. Officially, recession was declared in US in December 2008 while UK announced in January 2009. What followed was a mere guess – declining production, rising unemployment, falling household consumption and declining investments.
So with the world economy showing some positive signs(green shoots), the question taking rounds is whether it will be L,U,V or W recession.

Now let me explain the meaning of alphabets in present context? V shaped recovery means economy will bounce back from recovery with a bang and recovery will be strong. In U shaped recession, trough is not well defined like V shape. W shaped recovery means sharp decline, followed by a sharp rise back to the previous peak, followed again by a sharp decline and ending with another sharp rise of output. L shape means that output does not return to its pre recession level and grow at permanently lower path.

What are the indicators? Stocks Index, Commodity prices, Industrial production, employment, growth etc.
According to Ranjeet, the magnanimous stimulus and fiscal measures that has created deep hole in government’s pocket all over the world has started showing positive signals. The industrial production in US grew by 0.5% in July 2009, the first increase in nine months. The UK economy contracted by only 0.8% in the second quarter this year much lower 2.4% contraction of the first quarter of 2.4% contraction. The French and German economies both grew by 0.3% between April-June while Hong Kong emerged out of recession posting 3.1% growth during the same period. China's economy grew at an annual rate of 7.9% in the second quarter this year up from 6.1% in the first quarter. So can we say it’s a U-shaped recession? A U-shaped recession illustrates a rather long and deep bottom with recovery being seen in about 2 years.

But Neha Bhatt rules out V shaped recession as it’s already over one and a half year since the onset of the one of the biggest recession. A V-shaped recession illustrates a steep decline, a relatively short stay at a bottom and a rapid recovery in a period of 8-10 months as was the case with the 2001 recession.
Further, Ranjeet observes that many economists reports that the signs of revival are temporal and a true revival is still far away. The households are still cautious and in savings mode delaying their consumption. The weak recovery in demand is still stopping the producers from huge capital investments. Large fiscal deficits and its debt financing leading to rise in bond rates and capital flight is causing crowding out of private investments. Given all these, it seems the recent signs of recovery are just an oasis with the true recovery still far away. The fear of a double-dip recession can thus be not ruled out in the current situation. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession also known as W-shaped recession.

Only time will decide whether it’s a L, U, V or W-shaped recession.
What according to you will be the shape of recovery? and why?
Different indicators indicate towards different directions. According to you, which indicator gives better insight about the recovery?

8 comments:

Aditya said...

If we look at the BSE Sensex for India, we can say that the Indian economy has seen a V shaped recovery as the sensex fell from 20K in Jan 2008 to 9K mark in December 2008 and has recovered to 16k currently in a period of 9 months. This fits to what Neha Bhatt defines a V shaped recovery.

But to measure the recovery in an economy, Industrial Production and Unemployment rates appear to be better indicators. As these give us the internal strength of the business taking place in the economy rather than the stock index as they can be really volatile and takes into account the sentiments of the people in the economy, which can be really far from the true picture (so called Fundamentals).

Piyush S said...

The U.S. and global recovery will occur later than the optimistic consensus argues. The crucial issue facing us is not whether the global economy will bottom out in the third or fourth quarter of this year. It's whether the global growth recovery, once the bottom is reached, will be robust or weak over the medium term--say 2010-11. One cannot rule out a sharp snapback of GDP for a couple of quarters, as the inventory cycle and the massive policy boost lead to a short-term growth revival. The current consensus among optimists sees U.S. economic growth, going back in 2010 to a rate that is close to the 2.75% potential growth rate, and returning to potential by 2011. Many optimists go even further, arguing that the snapback of demand and production after the depressed levels of the current recession will lead growth to be well above trend (3.5% to 4%) for a couple of years, as most previous U.S. recessions have been followed by a period of above-trend growth once the recovery cycle starts.

Factors that will cause below-potential economic growth are---
1. The financial system (specifically, traditional commercial banks) is severely damaged, and the credit crunch will thus not ease out very fast. The equivalent of a bank run has hit most of the highly leveraged institutions of this system: 300 non-bank mortgage lenders are bust; the system of conduits and structured investment vehicles is gone; two major broker-dealers are gone, one merged with another bank and the last two converted into bank holding companies; money-market funds cannot even cover their costs, as interest rates are zero, ARS (Auction rate securities) market frozen. After $12 trillion of liquidity support, guarantees, insurance and recapitalization, most of the U.S. financial system is under effective government control(they have become kind of GM=Government Motors). And the financial sector damage is not limited to the U.S. The IMF estimates massive losses on loans and securities of other European banks, given their exposure to both domestic borrowers and emerging Europe, a region on the verge of a broader financial crisis. According to the IMF, even Japanese and other Asian banks are not immune to significant losses on loans and securities. Gold is a safety net where the government cannot provide one. Gold is money and is the strongest currency now in existence. The U.S. Dollar, Euro or Yuan are no match for a currency that cannot be created out of thin air. Gold is not an industrial commodity and does not require significant economic activity to maintain its value. It is a valuable portfolio insurance that will retain its value and rise significantly relative to traditional asset classes.

2. A large part of the corporate sector is also under severe financial stress, and its ability to increase production, employment and capital spending will be restricted by poor profitability driven by slow revenue growth, deflationary pressures and rising corporate defaults. Firms that in the past would have been able to roll over their loans, bonds and debts coming to maturity now face a liquidity crisis that may lead them into costly debt restructuring( already seeing this happen in lot of Indian companies). The ability to control costs and restore earnings by slashing employment will reach a limit, and excessive employment contraction has negative macro effects: Fewer jobs means less income, less consumption, less corporate revenue and lower profits and earnings.

Piyush S said...

3. Employment is still sharply falling in the U.S. and other economies(Yest Financial chronicle reported that there could be another 1000 job cuts in UK shortly(& there population density is far below than that of India)). According to the OECD, the unemployment rate in advanced economies will be close to 10% by 2010. And low medium-term growth will only lead to a slowly falling unemployment rate once the recession is over. Years of high and rising unemployment rates have corrosive effects on growth. Chronically unemployed workers lose skills and human capital, and they become less employable. Default rates and recovery rates on a variety of bank assets--mortgages, credit cards, student and auto loans--are highly correlated to the unemployment rate. And the pressures that globalization, technology and trade are putting on real wages will remain a hindrance to future growth.

4. The socialization of private losses and debt implies a sharp rise in public debt burdens. In the U.S. alone, the CBO estimates that the public debt-to-GDP ratio will rise from 40% to 80%, or about $9 trillion. If long-term rates then increase to 5%, the resulting increase in the interest rate bill alone would be about $450 billion, or 3% of GDP. In UK alone, this figure is expected to touch 82% of GDP by 2015. Quite staggering!!! Rising government debt ratios will eventually lead to increases of real interest rates that may crowd out private spending and may even lead to a sovereign refinancing/default risk.

Anonymous said...

Its an honest request not to CCP here..it would be rather nice to provide your own views rather that pasting somebody else's even if u do..do tell who has written it..
Here is a original author of the perspective above a named Nouriel Roubini.
PS: Respect originality.

http://www.forbes.com/2009/05/27/recession-depression-global-economy-growth-opinions-columnists-nouriel-roubini.html

Gaurav said...

Awesome!!!

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