What Is V-Shaped Recovery?

V-shaped recovery is a type of economic recession and recovery that resembles a "V" shape in charting. Specifically, a V-shaped recovery represents the shape of a chart of economic measures economists create when examining recessions and recoveries. A V-shaped recovery involves a sharp decline in these metrics followed by a sharp rise back to its previous peak.

Key Takeaways

  • A V-shaped recovery is characterized by a sharp economic decline followed by a quick and sustained recovery.
  • The recession of 1953 is an example of a V-shaped recovery.
  • A V-shaped recovery is different from an L-shaped recovery, in which the economy stays in a slump for a prolonged period of time.

Understanding V-Shaped Recovery

V-shaped recovery is one of the countless shapes a recession and recovery chart could take, including L-shaped, W-shaped, U-shaped and J-shaped. Each type of recovery represents the general shape of the chart of economic metrics that gauge the health of the economy. Economists develop these charts by examining the relevant measures of economic health, such as employment rates, gross domestic product (GDP) and industrial output.

In a V-shaped recession, the economy suffers a sharp economic decline, but quickly and strongly recovers. Such recoveries are generally spurred by a significant shift in economic activity caused by increased consumer demand and spending.

The recession of 1953 in the United States is a clear example of a V-shaped recovery. The economy was booming in the early 1950’s, but the Federal Reserve anticipated inflation, and thus raised interest rates which then tipped the economy into a recession. Growth began to slow in the third quarter of 1953, but by the fourth quarter of 1954 was back at a pace well above the trend. Therefore, the chart for this recession and recovery would represent a V shape.

V-Shaped Recovery Compared to an L-Shaped Recovery

In contrast to a V-shaped recovery in which the economy rebounds as strongly as it declined, an L-shaped recovery is type of economic recession and recovery characterized by a steep decline in economic growth followed by a slow recovery. In an L-shaped recovery, a steep decline caused by plummeting economic growth is followed by a straight light indicating a long period of stagnant growth. An L-shaped recovery is the most dramatic type of recession, and recovery can take as long as a decade.

Countries normally experience decreased economic growth every few years, and when economic growth decreases for roughly six months and then recovers, it is considered a recession. However, when economic growth drops more drastically and lasts for a year or more, economists typically classify it is as a depression. Because an L-shaped recession indicates a drastic drop in economic growth, and the economy does not recover for a significant amount of time, an L-shaped recession is often referred to as a depression.