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Shapes of economic recovery

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Shapes of economic recovery

What to study?

For Prelims: Shapes of economic recovery and features.

For Mains: India’s scenario and what should be the ideal recovery path?

Context: Most economists are unanimous that in the current financial year, India’s economy will contract.

  • The difference of opinion is only about the extent of this contraction.
  • The range varies between minus 4% to minus 14%.

Many economists are of the opinion that after hitting rock bottom this year, the economy will start its recovery in the next financial year (2021-22).

What should be the ideal shape of the economic recovery for India?

Given the weakness of the economy going into the Covid crisis as well as the less than adequate fiscal stimulus, India is likely to end up with an “elongated U-shape” recovery.

Shapes:

The Z-shaped recovery is the most-optimistic scenario in which the economy quickly rises like a phoenix after a crash. It more than makes up for lost ground (think revenge-buying after the lockdowns are lifted) before settling back to the normal trend-line, thus forming a Z-shaped chart.

Z-Shaped_Recovery

In V-shaped recovery the economy quickly recoups lost ground and gets back to the normal growth trend-line.

V-Shaped_Recovery

A U-shaped recovery is a scenario in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels.

U-Shaped_Recovery

A W-shaped recovery is a dangerous creature — growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart.

w-Shaped_Recovery

The L-shaped recovery is the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.

L-Shaped_Recovery

The J-shaped recovery is a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.

other_shapes

Other shapes:

  1. There is also the Swoosh shaped recovery, similar to the Nike logo — in between the V-shape and the U-shape. Here, after falling, growth starts recovering quickly but then, slowed down by obstacles, moves gradually back to the trend-line.
  2. There is also the Inverted square root shaped recovery. Financier George Soros, who coined this term years ago, explained that while there could a rebound from the bottom, the growth slows and settles a step down.

Factors responsible:

The shape of economic recovery is determined by both the speed and direction of GDP prints. This depends on multiple factors including fiscal and monetary measures, consumer incomes and sentiment.

InstaLinks:

Prelims Link:

  1. Have a brief overview of various curves mentioned above.

Sources: the Hindu.