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What shape are we in?

Economists the world over have been talking about the recession for so long now, but they still cannot agree how long or drawn out it will be. I find it fascinating how many different shapes are being used to describe where we find ourselves and where we are likely to be heading in the future.

There are the widely known ones: the ‘V’ shape where the economy goes into recession but then recovers quite quickly, or the ‘U’ shape which is similar to ‘V’ but the recovery is not so quick. (The worst example of the ‘U’ is the ‘bathtub’, where we bumble along the bottom for a long time.)

V-shaped recession

V-shaped recession

More recently, the talk has been about how we are likely to be in a ‘W’ recession, where there are signs of recovery but then we fall back into recession again.

One that has been seen in the past in Japan in the 1990s, which I hope will not be indicative of what is happening today, is the ‘L’-shaped recession. An L-shaped recession occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. The steep drop followed by a flat line makes the shape of an L. This is the most severe of the different shapes of recession. In Japan they talk about the lost decade; I hope this is not the case for the UK.

L-shaped recession

L-shaped recession

Certain economists have been considering whether these conventional shapes, based on the alphabet, are still relevant to explain our current situation. George Soros, for example, believes we are in an inverted square root: “You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that. You settle down – step down.” Someone else liked to call this the ‘Saxophone’.

Saxophone-shaped recession

The saxaphone shape

My favourite analogy could only be in our times – a commercial one – the ‘Nike swoosh’. This is where recession hits with an almost vertical descent but then has a much slower, shallower recovery.

No one knows which shape we will ultimately follow but, whatever model it may be, I just hope that we have reached the lowest point and are working our way back up. I prefer to concentrate on the model proposed by a trader back in the 2001 recession – a J-shaped recovery – which he says was “strictly for optimists”.

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