Ever wondered what was common among -2%, 0%, 1.5-2.8% and 2%? Well, these are the growth forecasts of the Indian GDP for the current financial year by Goldman Sachs, Barclays, World Bank and Fitch respectively. With over 19 lakh corona cases confirmed worldwide, the world economy is staring at one of its greatest recessions since World War II. Unlike other recessions, where the culprit was either excessive leverage, complex financial products or inflated asset prices, this one is triggered by a medical emergency which has forced billions of people to stop economic activity.
Two important questions to look answers for during hard times are, first, when will the growth pick up and how quickly can it recover. While pundits debate on how the recovery would look like, there are some pathways which resemble the alphabet soup.
First is a V-shaped recovery. Typically, this is a best-case scenario where economic activity comes back to pre-crisis level once normalcy is restored. Corporate profits come back to prior levels and so does consumer confidence and very soon, the memory of downturn fades away.
Second refers to a U-shaped recovery. Once the shock hits the economy, output, demand and income remain flat for a relatively long period of time before there is an uptick in consumer confidence. Simon Johnson, former Chief Economist for the International Monetary Fund, said that a U-shaped recession is like a bathtub: "You go in. You stay in. The sides are slippery. You know, maybe there's some bumpy stuff in the bottom, but you don't come out of the bathtub for a long time."
Third and worse is a W-shaped recovery also called the double-dip recession. This case initially appears like a V-shaped recovery but then ends up turning back down again. The initial growth could be attributed to a stimulus by the government or the central bank but once that is exhausted, the output and consumer confidence falls to crisis levels.
Fourth and the most worrisome is the L-shaped or hockey stick recovery. The growth holes out and does not pick up for a long time despite all policy measures. The Japanese asset price bubble of the 1990s is a prime example of this recession.
As India enters the second phase of its national lockdown, it would be interesting to see how the Indian economy picks up from the COVID-19 scars, whether it follows one of these patterns or carves out an unconventional path to recovery. With RBI firing all bullets to reduce the damage and Modi government putting its best foot forward, let us all hope for a V-shaped recovery for the Indian economy.
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