COMMENTARY
Commentary: The Shape of Recovery: V or L?
May 14, 2009
Christopher Bjorke

After the hits the economy has taken over the past months, some tentative discussion is beginning about “green shoots,” stock market gains and life after the recession. Recovery is bound to follow the crisis, but the question is how strong will it be?

Two opposing patterns of recovery possibilities are the “V shape” and the “L shape.” The former envisions robust growth following a steep descent, but the latter consists of relatively flat economic activity once the recession hits bottom.

Another question is to what degree will Asia contribute to a recovery? Before the crisis, the developing Asian economies accounted for the strongest worldwide growth on the back of their export industries. With their trade partners in recession, exporters have faced tough losses.

So how will the system get started again?

The road ahead

The Peterson Institute for International Economics recently presented analysis supporting both scenarios.

Arguing for the V-shaped recovery, institute fellow Michael Mussa predicted a comeback starting in the second half of this year, based largely on what happens in the United States and China.

“Aided by substantial policy stimulus, growth in the Chinese economy should begin to accelerate in the first half of 2009 and the U.S. recession should bottom out around mid-year with recovery accelerating to about 4 percent annual rate by the fourth quarter,” Mussa wrote.

He predicts growth in China to rebound to 7.5 percent in 2009 and to exceed 8 percent next year, helping lift China’s smaller neighbors in the region. India, which is less integrated with the world economy, should also see strong positive growth.

The recovery of Asia goes hand-in-hand with that of the West. Mussa predicts the U.S. economy reaching 4 percent annual growth in 2010, supported by stimulus spending. His projection is based in part on past patterns of strong expansion following steep declines.

The argument for a stagnant aftermath comes from Mussa’s Peterson Institute colleague Simon Johnson, who predicts that the damage done to the financial sector, to real estate and to spending by consumers and companies worried about the future will keep growth flat in 2009-10.

It may still be too near the beginning of the crisis to say whether one can be cautiously optimistic or if it is better to brace for a long, hard climb back. Recovery in the United States remains a question. Growth in Asia is modest, but also depends on the prospects of the developed world. In any case, it is clear that the future of both regions depends on the other.

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