The Shape of the Recovery May End Up Coming From Another Alphabet

They’ve turned to letters and shapes in an effort to illustrate the unprecedented economic upheaval caused by the pandemic. The 2008-09 financial crisis had Ben Bernanke’s “green shoots” and angst about a “double dip” recession. In 2020, we’ve heard about not only a V-, U-, L-, and K-shaped recovery, but also a Nike Swoosh and Cape Cod in winter. The econospeak has even cracked into the mainstream, showing up in presidential debates and in major media.

At the onset of the pandemic, many economists predicted a quick bounce back to normal activity following a sharp downturn triggered by the widespread closure of businesses and schools. Countries with relatively healthy economies going into the pandemic seemed best poised for the so-called V-shaped recovery. Some had their own spin on the V, such as Larry Summers, former U.S. Treasury secretary, who compared it to “Cape Cod in winter,” whereupon a tourism-fueled local economy shuts down in the frigid months to rebound when beach weather returns.

But as the virus proved more and more difficult to control, with many nations enduring successive waves of infection, economists scrambled to revise their forecasts. Descriptions of the shape of the coming recovery became more fanciful. There was the Nike Swoosh (aka the recumbent J). Also, the square root sign or what France’s central bank governor called “the bird’s wing”—that is, a big contraction followed by a quick turn up and then a plateau.

In the U.S., one Federal Reserve official predicted that virus resurgences would create a pattern of ups and downs in economic activity that would resemble a W with “a wiggly tail.”

The Latin alphabet may not be the best choice to depict the longer periods of sluggish growth we may be in for. Analysts at Robeco Institutional Asset Management offered up the Arabic letter Baa, arguing that its long horizontal sweep is better suited to illustrate our economic reality.

At least the economy is past what Joachim Fels, global chief economic adviser at Pacific Investment Management Co., described back in March as the I-shaped phase of the cycle, where growth drops off precipitously with no clear prospect of a bounce back.

Another theory is that the pandemic has inflicted long-lasting economic damage, setting the stage for a very slow recovery or outright stagnation: the dreaded L shape. While such a scenario looks unlikely, the fear that many workers may be locked out of the job market for years, or even forever, has been palpable among some European Central Bank policymakers. Japan’s experience in the 1990s, known as the lost decade, is a worrying precedent.

Complicating the debate around the recovery’s trajectory, some analysts have taken to applying a V shape to some segments of the economy, or to particular countries. But a V shape can be misleading: A 5% rebound from a 5% drop doesn’t bring an economy back to its prior health.

Peter Atwater, an adjunct lecturer in the economics department at William & Mary, a U.S. college, says the letter that better captures the stark reality of 2020 is K. The pandemic hasn’t affected everyone equally and has widened many existing inequalities. The two diverging strokes of the K illustrate this: Those who weren’t in the best economic position before the crisis—for instance, low-income workers in such industries as tourism, entertainment, and hospitality that were devastated by the virus—are more likely to have lost jobs this year. The top of the K represents people in better circumstances, including those who can work from home and may have seen their stock portfolios soar.

The arrival of vaccines is giving economists hope. Some say we could still see a V-shaped bounceback if sufficient numbers of people are inoculated. Others, taking into account the prolonged period of low growth we’ve had in the past year, say a strong rebound would make this period resemble a U or J. With several major cities having to implement new lockdown measures to bend the curve of infections, it’s possible the shape of the recovery will not reveal itself for many more months.

©2020 Bloomberg L.P.