LONDON, May 7, 2020 /PRNewswire/ -- Many are still discussing what type of recession will ensue following the COVID-19 pandemic. Will it be U, V or L–shaped? Different people may refer to the same shape to mean different outcomes.
To bring clarity to this issue, this insight sets out the standard economic definition of each type of recession. The pandemic is forecast to give rise to different shaped recessions in different countries. For the world economy, CRU forecasts a U-shaped recession - defined as a permanent loss in the level of world GDP, but no change in the long-term growth rate of world GDP.
Recession shape defined by what happens to the level and growth rate of output
When assigning a letter to a recession, it is important to be clear how each letter represented recession is defined. Most common ones are V, U and L-shaped. Less frequently used is the double-dip recession – which is referred to as W; and a tick-mark recession, which includes a sharp downturn followed by a prolonged recovery. However, the latter two are variants of the three main types of recession, which we focus on here .
There are two factors which help differentiate the three types of recession – whether there is a permanent loss in the level of output and a persistent fall in the growth rate of output.
Factor 1: Whether the recession causes a permanent loss in the level of output.
This happens when the missed spending during the downturn is not fully made up during the recovery phase. A good example of a permanent loss in output level is when a haircut missed in March, is unlikely to be followed by two haircuts in April – in that sense some expenditure is lost permanently.
Factor 2: Whether the growth rate of output returns when crisis is over.
If the economy sees a permanent loss in its level of output but can return to its pre-crisis growth rate in the medium term – it will be called a U-shaped recession. To continue with the example above, this occurs when the missed spending (e.g. haircuts) is not made up, but will continue at the usual frequency once the pandemic is behind us.
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