WHAT is L-Shaped Recovery

An L-shaped recovery is a type of economic recession and recovery characterized by a steep decline in economic growth followed by slow recovery.

When referring to recessions and the periods of recovery that follow, economists often refer to the general shape that appears when charting relevant measures of economic health. For instance, employment rates, gross domestic product and industrial output are indications of the current state of the economy. In an L-shaped recovery, there is a steep decline caused by plummeting economic growth followed by a straight light indicating a long period of stagnant growth. In an L-shaped recession, recovery can take a decade or more.

Recoveries can also be V-shaped, W-shaped and U-shaped. As in an L-shaped recovery, these names are based on the shape seen on a chart of relevant economic data.

BREAKING DOWN L-Shaped Recovery

An L-shaped recovery is the most dramatic type of recession and recovery. Because there is a drastic drop in economic growth and the economy does not recover for a significant period of time, an L-shaped recession is often called a depression.

Countries normally experience decreased economic growth every few years. When economic growth decreases for roughly six months and then recovers, it is a recession. However, when economic growth drops more drastically and lasts for a year or more, it is called a depression.

L-shaped recovery examples

What is known as the lost decade in Japan is widely considered to be the most infamous example of an L-shaped recovery. Leading up to the 1990s, Japan was experiencing remarkable economic growth. In the 1980s, the country ranked first for gross national production per capita.

During this time of growth, real estate values and stock market prices were quickly rising. Concerned about over-valuation of property, the Bank of Japan raised interest rates in 1989. A stock market crash followed, and annual economic growth slowed from 3.89 percent to 1.14 percent between 1991 to 2003. During that time, Japan experienced what is now known as the lost decade. It failed to recover from the crash for 10 years and experienced the consequences of a slow recovery for another decade after that.

The sharp economic decline experienced by Greece in 2006 and 2007, followed by stagnant growth, has also been called an L-shaped recovery. More recently, Greece has begun to make a slow recovery, experiencing 1.6 percent economic growth in 2017 with predictions of continued growth in 2018.