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
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.
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.
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.
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”.