Economic Recovery: What do K, V, U, L, W-shapes recoveries really mean?

The Covid-19 pandemic has ravaged all major economies, including India’s. The country’s Gross Domestic Product contracted by 7.3% in 2020-21. How the economy will recover from here on is a matter of debate. 

Economists say that recovery after a recession can come in five different shapes – V, U, L, W and K. They are named after how each recovery would look when plotted on a graph.

A V-shaped recovery is the best-case scenario, where the economy bounces back immediately after a sharp decline to go back to its pre-recession level in less than a year. The rebound can be bolstered by appropriate fiscal and monetary policies. 

In a U-shaped recovery, also described as the ‘Nike Swoosh’ recovery, the economy experiences stagnation for a significant period of time after declining. It then rises gradually to its previous peak. This means the recession lasts longer, causing job losses and erosion of savings. 

The L-shaped recovery represents the worst-case scenario. Here, the economy fails to regain its peak GDP even after several years. This has the longest recession period among all shapes. The downturn and the slow revival sometimes lasts indefinitely.

Also called the “double-dip recession”, a W-shaped recovery sees an economy staging a brief comeback only to fall a second time. This scenario breaks consumer confidence and enters the full recovery period that can take up to 2 years. The economy will witness two recessionary periods. 

The K-shaped recovery is a new term that economists have created to describe what is happening with the Covid-19 pandemic. According to one analysis, the Covid recovery path branches into two different directions. Large-cap companies and public-sector enterprises with access to government support and central bank stimulus packages will help some areas of the economy recover faster. The small and medium companies, along with blue-collar workers, are left out of the recovery process. The divergence between these two groups is represented by the two diagonal lines in the letter K. Such a recovery takes place when different parts of the economy recover at vastly different rates.