23 September 2020
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Is it an economic forecast or a Spelling bee competition? Hard to tell the difference recently. According to a Bank of America survey of 223 fund managers, only 10% expected “a V-shaped recovery, while 75% forecast prolonged U- or W-shaped recoveries”. This was in mid-May. Earlier in April, Reuters conducted a poll among the world’s economists. “More than 55% or 87 of 155 economists said the global economic recovery would be U-shaped. Thirty-one analysts said it would be V-shaped and 24 said it’d be more like a check mark. A few respondents expected a W- or L- shape.” Also making the rounds on social media, a visual explainer by the Brookings Institution of early May (The ABCs of the post-COVID economic recovery).

Author:  Jure Stojan, DPHILL

What is going on? Clearly, we are talking about economic charts here – describing the health of the global economy. To quote a bare-bone definition, “Economists talk about V-shaped, where we go down, bounce right back up again, or an L-shaped recovery, where we go down and just sort of lie along the bottom of the graph for a period of months before we start back up again.” This is as simple as it gets – as it should. After all, it is a quotation from a television script, for CBS’s Face the Nation. Back from 1975! The alphabet approach to economic forecasting is apparently much, much older than the covid-19 pandemic. Already in the 1950s, economists were telling people to dampen their enthusiasm. Even if a tell-tale letterform really was spotted in some economic chart, it would make us none the wiser. “V-shaped recovery guarantees nothing with respect to height. The present one may not carry us all the way back to full employment, even moderately defined,” the National Industrial Conference Board cautioned in 1958.

Economists talk about V-shaped, where we go down, bounce right back up again, or an L-shaped recovery, where we go down and just sort of lie along the bottom of the graph for a period of months before we start back up again.

That year, at least, economic recovery was relatively easy to spot in the charts. This time around, uncertainty is much larger. In 2020, the range of possible forms has been extended beyond the letters. “Economist Joseph Brusuelas at RSM sees the recovery taking a “Nike swoosh” pattern with a more gradual, but still aggressive recovery,” reports CNBC. The last time when economists were fighting over letter-shaped macroeconomic patterns, in 2009, the famed investor George Soros suggested the square root shape, √. Regardless of the shape of economic recovery, another pattern emerges: it only makes sense to discuss such forms when the recovery is still away in the unknowable future (or is in its early stages at the latest). 

“The US Recession: V or U or W or L-Shaped?,”

–   Nouriel Roubini,  April 2008

Nouriel Roubini famously asked in a research note in April 2008. Or to quote another analyst from 1999, this time discussing emerging markets crises: 

"The 1994 Tequila crisis was characterised by a 'V-shaped' pattern: drastic economic collapse followed by rapid recovery. The 1980s debt crisis manifested an 'L-shaped' or 'extended' recovery pattern.”

Clearly, this letter-talk only makes sense during a recession. Also, it appears to be deeply comforting – allowing people to inject some structure into thinking about things which are essentially unknowable. Humans, after all, are pattern-seeking animals. And there are patterns to be found. 

“For example, the specific cycles of some series usually show a marked decline in the rate of contraction for some months before they make their cyclical upturns, while in other series the specific cycles usually have sharp V-shaped troughs”

Wesley C. Mitchell and Arthur F. Burns observed in 1938. (Their methods to date US recessions are still in use today by the National Bureau of Economic Research.) ​

More up to date, it is commonly agreed that the 1973–75 US recession took a clear a distinct V shape, the 1981–82 recession a U shape, while the 1990–91 slump was L-shaped. However, such pattern recognition only makes sense if you have a single line to represent an economy through time – commonly, gross domestic product (or the related gross social product), developed in the late 1930s and early 1940s. Indeed, the Adriatic Journal could find no citations to letter-shaped economic recoveries before that date (not even in books discussing patterns in stock price charts).

Adriatic Journal

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