Prospects for recovery - a round-up of expert opinion on the shape of the recession

Buoyed by a recent string of relatively positive data, many commentators have been tempted to call the bottom of the recession. But while some analysts claim the worst is behind us, others believe the crisis is far from over.

The shape of the recession has been a point of contention since the beginning of the downturn. Predicting the point at which the markets bottom out is an incredibly difficult task - and yet many businesses rely on accurate predictions if they are to efficiently plan for the future.

There is still nothing approaching a consensus on the shape of the recession and eventual recovery. But here we present a rundown of the predictions being made by those who are brave enough to make predictions at all.

The V-shaped recession

For many analysts, a V-shaped recession would be preferable now. According to this prediction a sharp downturn would be followed by a rapid recovery.

If you believe those who say that the worst of the crisis is behind us, a V-shaped recession is probably the best you can hope for. Some data suggests that the UK economy may stabilise during the third quarter of 2009, and some analysts are predicting that output will grow during the first quarter of 2010. Indeed, Martin Weale, Director of the National Institute of Economic and Social Research, has said he does not “regard 3.5 per cent as a ridiculous figure to be forecasting” when looking at 2011 GDP growth. This would put growth well above that of Q3 2007 - a pretty good point to take as the ‘top’ of the V shape.

There is plenty of precedent for a V-shaped recession; these sorts of ‘dips’ into negative growth are relatively common, and it is assumed that a recovery will be complete within around a year. The last such dip occurred in 1991. But this recession does seem unique, both in its severity and in its scope - it appears more like a quake affecting every part of the economic apparatus, rather than an isolated shock like the bursting of the dot-com bubble.

The tick-shaped recession

More recently, some analysts have been suggesting that the shape of the UK recession might follow that of a tick, in which a sudden downturn is followed by a gradual recovery.

This theory has been given added credence in recent days, as new economic data suggests that the contraction suffered by the UK economy during the first quarter of the year was significantly worse than had previously been thought. But on its own that data only really tells us about the downturn (the ‘corner’ of the tick), and not about the recovery.

There are several compelling reasons to believe that the recovery will be significantly slower than the V-shaped ‘bounce’ that some are predicting. To begin with, although it has stabilised, activity in the credit markets is still at historically low levels. Similarly, consumer confidence is still suppressed as a result of continuing job insecurity.

The W-shaped recession

There are increasing fears that we are actually facing a W-shaped, or ‘double-dip’ recession, in which an initial recovery would be followed by a second downturn.

Double-dip predictions have long been made by those of a more bearish persuasion - and, again, there is some evidence to suggest that they might be right. If, for example, it is accepted that the house price crash was a correction of previous overvaluations, why should we believe that houses are now properly priced? Who is to say that the recent figures showing a stabilisation in the markets is any more than a blip?

There is also significant concern that world financial leaders may actually have been unwitting architects of their own doom. The unprecedented amounts of money that have been dedicated to schemes like quantitative easing could yet lead to unmanageable levels of public debt, or to hyper-inflation. Indeed, as World Bank President Robert Zoellick has said, “Recent gains could be reversed easily, and the pace of recovery in 2010 is far from certain.”

The U-shaped recession

A U-shaped recovery would mean a longer, deeper downturn, followed by a gradual recovery occurring over roughly the same period.

Again, the data showing that the first quarter of this year was worse than expected is being cited by some as evidence of a U-shaped recession. For many analysts, this pattern seems most likely. A shock of the magnitude suffered by the UK economy is likely to take some time to fix, particularly as there is still significant disagreement regarding the proper course of action.

But it is generally thought that a U would be better than a W, as a sustained effort to stabilise the economy (continuing through the low point of the U and into the upturn) would be preferable to the early removal of support measures at the middle point of a W-shaped recession - a risk about which Bank of England governor Mervyn King has already warned.

The L-shaped recession

Finally, there is still the possibility that we are entering an L-shaped recession, in which a severe downturn is followed by an extended period of economic stagnation. This period would be expected to last for up to a decade.

This would be almost exactly as bad as it sounds. Japan endured an L-shaped recession which resulted in its ‘lost decade’ - ten years with no economic growth, from which it was only just beginning to emerge before the current crisis hit.

So who to believe? Without conclusive data, investors and market watchers alike are reverting to type; bulls are predicting a V, bears are rooting for a U, and the pathologically pessimistic are convinced that an L-shape recession will continue to wreak doom for years to come.

In lieu of accurate predictions, the best businesses can do is to plan for all eventualities. Ensuring that your business is as lean, agile and well managed as possible will help you to guide it through the stormy waters of recession - whatever shape the recession might take.