Is it a V or an L-shaped recession?

The case for a "V":

"Aided by substantial policy stimulus, growth in the Chinese economy should begin to accelerate in the first half of 2009 and the US recession should bottom out around mid-year with recovery accelerating to about a 4 percent annual rate by the fourth quarter. Recoveries in other countries will likely lag a little behind those in China and the United States. But, aided by a bounce-back in global trade from its recent extraordinarily sharp decline, the world economy generally will be in recovery by year-end. Then we will observe, as we have many times before, the Zarnowitz rule: Deep recessions are almost always followed by steep recoveries." Extract from a paper by Michael Mussa at the Petersen Institute

Going to "L" (wrapped in balance-sheet shrouds):

"The main short-term issue for the shape of our recovery is surely that balance sheets are perceived as damaged all around the world.  Plenty of creditworthy consumers think they need to be more careful.  Firms with sensible investment projects are worried about the future availability of credit.  Governments have only a limited ability to engage in fiscal stimulus; almost no one ran a sufficiently counter-cyclical surplus during the boom.  And policy responses in most of the G20 remain inadequate." Extract from The Baseline Scenario

See also:

"While most forecasters expect positive growth in most parts of the world in 2010, those forecasts seem to reflect expected reversion to the mean rather than any identified mechanism for economic recovery. The underlying assumption is that at some point economic weakness becomes its own cure, as falling prices finally prompt consumers to consume and businesses to invest. But given the unprecedented nature of the current situation, it seems by no means certain that that assumption will hold. In particular, with demand low around the globe, the typical mechanism by which an isolated country in recession can recover - exports - cannot work for everyone." Extract from the current outlook according to the Baseline Scenario

And also:

"Speaking at the annual lecture of the Stationers' and Newspaper Makers' Company, Sorrell, the chief executive of [advertising agency] WPP, said the L-shaped recession matched the protracted downturn and recovery seen in Japan's economy in the 1990s." Extract from The Guardian

…an upward sloping "L", perhaps?

"At some point, the cycle will begin afresh. Henry Kravitz of the private equity house KKR recently said that at least $300bn–$400bn of private equity money is waiting for deals. Eventually, low stock market valuations will become irresistible, and the gears of mergers and acquisitions will again crunch into action – albeit with considerably less leverage than before. Then the pendulum will begin to swing back." Extract from Sir Martin Sorrell in the Financial Times

Tags for this entry: policy macroeconomics recession stimulus stocks