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.

RELATED TERMS
  1. V-Shaped Recovery

    A V-shaped recovery refers to a type of economic recession and ...
  2. U-Shaped Recovery

    A U-Shaped Recovery is a type of economic recovery that experiences ...
  3. Economic Recovery

    An economic recovery is a period of increasing business activity ...
  4. Recovery Rate

    Recovery rate is the extent to which principal and accrued interest ...
  5. Jobless Recovery

    A jobless recovery refers to when economic growth post-recession ...
  6. Recession

    A recession is a significant decline in activity across the economy ...
Related Articles
  1. Financial Advisor

    The Top ETFs For a Fast Recovery After a Recession

    Recession and recovery cycles are imminent in the markets. Here are the ETFs, which provide the best performance for a fast recovery after a recession.
  2. Insights

    Is a Recession Coming?

    Even as a number of economic indicators look good, global conditions and inflation levels point to the imminence of another recession.
  3. Insights

    Top 4 Things To Know About The Last Double-Dip Recession

    The financial media and investors are haunted with the prospect of a double-dip recession. We look to the past to see if a double-dip recession is in our future.
  4. Investing

    Understand the Security Types of Corporate Bonds

    Any investor should be aware of the different security types regarding corporate bonds as well as the direct correlation to potential recovery rates.
  5. Insights

    4 Forces Behind Income Inequality in America

    Two-thirds of U.S. households saw their income decline or stay flat between 2005 and 2014. A McKinsey report has taken an innovative look at this demographic.
  6. Insights

    Will Your Net Worth Be Affected By A Recession?

    Here's a look at how a potential recession could impact your net worth in a negative way.
  7. Investing

    Cash Heavy Companies

    Large cash holdings and strong balance sheets means these companies could lead the way to recovery.
  8. Insights

    Do Declining Corporate Margins Point To Recession in 2016?

    Learn how declining profit margins have foretold nearly every recession of the past 50 years, and analyze whether they may signal economic contraction in 2016.
  9. Managing Wealth

    Top 6 Recession Investing Myths

    Find out the truth about recessions and how they impact your portfolio.
  10. Investing

    American Consumers Stay Remarkably Disciplined

    During the past year, households have taken 6 percent of their after-tax income to either set aside in savings vehicles, purchase financial assets, or pay down debt.
RELATED FAQS
  1. When do you use installment sales method vs. the cost recovery method?

    Take a deeper look at the installment sales method and the cost recovery method of recognizing business sales revenue and ... Read Answer >>
  2. What's the best investing strategy to have during a recession?

    During a recession, investors need to act cautiously but remain vigilant in monitoring the market landscape for opportunities. Read Answer >>
  3. What macroeconomic problems do policy makers most commonly face?

    Learn about the macroeconomic factors policymakers have to be concerned with when deciding on economic policies, such as ... Read Answer >>
  4. What impact does economics have on government policy?

    Learn about the impact of economic conditions on government policy and understand how governments engineer economic conditions ... Read Answer >>
  5. How does a bull market affect the economy?

    Find out why it can be difficult to prove any real causal link between rising stock market prices and a healthy, growing ... Read Answer >>
  6. What are some of the ways economic growth can be achieved?

    Discover some of the different ideas economists promote to achieve economic growth and how there is little agreement about ... Read Answer >>
Trading Center