U, V or W- What Shape The Economic Recovery Will Look Like ?

28 06 2009

Recession is passé now. So it seems. If one looks at the recovery in the stock markets the world over. It looks like recession was a 2008 event and 2009 is well ready for a recovery. The BSE Sensex in India has moved from 8200 on March 9th to nearly 14500 now. A growth of over 80%. Many stocks have doubled and some have even tripled in this period.  

Does this mean that the bad news is behind us? Is the recession over? Will the real economy go back to the heady days of 2006-07 or early 2008? On that the opinions are varied.

One simple method to predict the shape of the recovery is the shape of the curve based on the shape of the alphabet. The most optimistic of the economists and analysts predict a V-shaped recovery, in which the lowest point can be considered as Nov-Dec 2008. The optimistic analysts prognosticate that there is still pain left; hence the current recovery from March onwards is just a bear-market rally. The markets will go down again and only in 2010 will the real bull market start again, hence the shape shall be a W. The pessimists indicate that the stock markets are out of touch with the real economy and the real economy will revive very gradually over the next 18 months. The shape of the curve is hence a U. The doomsday analysts say there will be no recovery at all for a long-long time like the way the Japanese economy went through in the 90s, hence the shape of the curve will be like an L.

Jamie Dimon, the CEO of J P Morgan in an interview to TOI  says, he is unsure what shape the recovery will be. He says :

Of course, the world went through a deep recession—call it a Great Recession—and it was much worse in the US or Europe than in China or India. But I think the world is on course to stabilisation. You see it in consumer spending, business plans, confidence levels, inventory balances, purchasing indices. Sectors like housing in the US are still getting worse, but at a much slower pace. So we’re actually seeing a global bottoming out. But I don’t think anyone knows whether the recovery will be V, or U, or W-shaped. I’m not going to spend a lot of time guessing on that.”

Maybe Dimon does not have time to guess the shape of the recovery. Without using any tools or surveys, my instinct tells me that this rally is unreal, but the market and the economies will bounce back. I am betting on a W shaped recovery.

What letter are you betting on?

– G. Mohan




One response

30 06 2009

U,V or W? Come to think of it, there is hardly another letter that fits the scheme in the English language. L is something that comes close. L stands for love; L also stands for learning. But the damned alphabet does not have a lift after the fall! Whatever, hopefully there would be some Learning curve that comes with the turbulent experience.

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