The Shape of Things to Come

2 July 2020, 8:30 a.m.

(Disponible en français : La forme que prendront les choses à l’avenir)

The COVID-19 pandemic has caused a rapid global economic contraction. Many forecasters are predicting an economic downturn not seen since the Great Depression. In Canada, as in other countries, protective measures such as lockdowns to contain the spread of the virus have severely restricted economic activity.

Even as businesses are reopening and people are resuming activity, an economic recession in Canada is all but assured for 2020. It is worth noting that, even in the absence of lockdown measures, the economy would likely have slowed, due to changes in consumer and business behaviour in reaction to the pandemic health threat.

Economic predictions are difficult in the current context. There is much uncertainty about the duration and intensity of the coming recession. The nature of the economic downturn will largely depend on the magnitude, severity and evolving nature of the pandemic and the success of containment measures.

While there is much uncertainty ahead, it is not too soon to discuss what the economic recovery might look like. The shape of letters such as V, U, L and W are sometimes used by economists as visual tools to describe the shape of recessions measured in terms of Gross Domestic Product (GDP).

For example, a recession that seems to get worse, then better, then worse, then better is “W-shaped”. Severe recessions that have long-lasting effects on economic growth are “L-shaped,” while “V-shaped” recessions describe a drop in economic output followed by a steep recovery, and “U-shaped” recessions fall somewhere in between.

Shape of Economic Recoveries and Examples

V-Shape

In a “V-shaped” recession, the economy declines then recovers rapidly resulting in a brief but significant disruption to the economy.

In 2008, Canada experienced a few quarters of negative growth before rebounding.

The recession in Canada in 2008 and 2009 had a V shape, as the economy suffered a short contraction over three quarters and then a rapid return to growth.

U-Shape

A “U-shaped” recession is represented by many quarters of negative growth before recovering.

In the early 1980s, Canada experienced a significant recession. It was a period marked by high interest rates and high inflation.

The recession in Canada between 1980 and 1982 took the shape of a U, as the economy contracted for five quarters, stagnating slightly before recovering.

W Shape

In a W-shaped recession or a double-dip recession, the economy declines, improves briefly then decreases once again before recovering.

The United States experienced back-to-back recessions between 1980 and 1982 following the 1979 oil shock.

The recessions in the United States between 1980 and 1982 resulted in a W shape because, after two quarters of recession, the economy recovered quickly but then contracted a second time, leading to another recession that lasted three quarters before growth again resumed.

L Shape

In an L- shaped recession, the economy declines and remains stagnant over many years.

In the early 1990s, Japan’s GDP growth declined substantially then remained low for many years. This prolonged recession is sometimes described as Japan’s “Lost Decade”.

The recession in Japan between 1989 and 1999 had an L shape because gross domestic product fell for two quarters and then grew slowly for nearly 10 years.

More Historical Examples

South Korea 1997-1998, Canada in 1990 and 1991 and Portugal in 1974 and 1975 are examples of V-shaped recessions. Brazil between 2014 and 2016, Lithuania from 2008 to 2009 and South Africa between 1989 and 1992 are examples of U-shaped recessions. Spain between 2008 and 2014, Italy from 2008 to 2014 and Turkey between 1998 and 2001 are examples of W-shaped recessions. New Zealand in the 1980s, the United Kingdom in the 1970s and the Netherlands in the 1970s and 1980s are examples of L-shaped recessions.Author: Emmanuel Preville and Corentin Bialais, Library of Parliament