U,V,W or something else.... What shape will it be eventually ? Everyone wants to know about it. No, am not talking about something pertaining to English literature. Its about the painstaking graph that this economic recession will take through up until its end and for the world economy to come back to its normal growth progression. Well read and well-informed researchers and economists have all tried to through their hat in to decide the course-graph that this recession could eventually take.
The first case is the shape of 'V' that this recession could take. This essentially means that economy will have a steep decline in its growth, but its rebound will also be quiet sharp. This kind of recession and its recovery will resemble closely to the alphabet 'V'. This has always been the case in superficial recessions like the ones in 1983 and in 2001. These are typically those recessions that comes in a cyclical fashion after every economic bubble. They are shallow recessions which doesn't affect the job market in a significant manner. But this 'V' shaped rebound have been ruled out when it comes to this particular recession. The main reason being that this recession is an outcome of a virulent housing market bubble going bust. Soaring housing market and typically low interest rates have long fuelled a huge booming housing market in the US. People started using their homes like some kind of ATM machines, mortgaging them and withdrawing money and getting huge profits due to a booming housing market.
The sub-prime crisis and huge dip in housing market were instrumental in bringing the housing prices to record low levels. Unable to cope with rising interest rates and lowering home rates citizens felt it was impossible to either sell their homes or pay their mortgage loans. This led a huge amount of loan defaulters and many foreclosures followed. The banks unable to flush out these bad debts went bankrupt overnight. This was manily due to bad and directionless management of mortgage and bad debt accumulation by these banks.
This triggered a huge stock market crash which started immediately followed by the Chapter 11 bankruptcy filing by Lehmann Brothers. Many banks like AIG and Morgan Stanley faced unprecedented drain of assets and cash equivalents. Many Americans lost jobs as many industries like the automobile industry in particular, were closing down their many manufacturing plants.
This was the start of long and painful recession which many believe will chart out a 'U' shaped recovery in the coming year.Most economists, including Federal Reserve Chairman Ben Bernanke, predict a slow and gradual upturn. To be sure, the telltale recovery signals have been flashing green lately. Factory output and new orders grew last month at the fastest pace in two years. These are what many state as "Green Shoots" in the recovery path of the economy.And with inventories of stores and manufacturers depleted, factories must soon ratchet up production just to restock. So, this is the way economists bet,the economy will grow to get out of recession, the 'U' shaped recovery, slow and painful recovery.
Now to the theory of a 'W' shaped recovery,the occurance of it,many believe is remote .The recovery will be muted, largely because consumers are in no mood to open their wallets. They have lost $13 trillion of wealth in the recession's housing and stock market crashes and appear determined to sock away any extra cash they have.The savings rate jumped to 5.2% in the second quarter from a low of 1% before the crisis. Consumer spending in the US accounts for 70% of the economy. So, any dip in consumer spending will greatly affect a dynamic, consumer centralized economy like the United States.
A small group of experts believes the economy will endure an unusual W-shaped, or "double-dip," recovery in which the economy falls back into recession before growing again.The massive liquidity, plus rising commodity prices, will increase inflation. Meanwhile, many believe the Fed reserve will be loath to raise interest rates to stave off inflation in 2010, because doing so could tamp down what will be a weak recovery in next year.So, these are the three major theories that is doing rounds in terms of recovery in global economy.
The first case is the shape of 'V' that this recession could take. This essentially means that economy will have a steep decline in its growth, but its rebound will also be quiet sharp. This kind of recession and its recovery will resemble closely to the alphabet 'V'. This has always been the case in superficial recessions like the ones in 1983 and in 2001. These are typically those recessions that comes in a cyclical fashion after every economic bubble. They are shallow recessions which doesn't affect the job market in a significant manner. But this 'V' shaped rebound have been ruled out when it comes to this particular recession. The main reason being that this recession is an outcome of a virulent housing market bubble going bust. Soaring housing market and typically low interest rates have long fuelled a huge booming housing market in the US. People started using their homes like some kind of ATM machines, mortgaging them and withdrawing money and getting huge profits due to a booming housing market.
The sub-prime crisis and huge dip in housing market were instrumental in bringing the housing prices to record low levels. Unable to cope with rising interest rates and lowering home rates citizens felt it was impossible to either sell their homes or pay their mortgage loans. This led a huge amount of loan defaulters and many foreclosures followed. The banks unable to flush out these bad debts went bankrupt overnight. This was manily due to bad and directionless management of mortgage and bad debt accumulation by these banks.
This triggered a huge stock market crash which started immediately followed by the Chapter 11 bankruptcy filing by Lehmann Brothers. Many banks like AIG and Morgan Stanley faced unprecedented drain of assets and cash equivalents. Many Americans lost jobs as many industries like the automobile industry in particular, were closing down their many manufacturing plants.
This was the start of long and painful recession which many believe will chart out a 'U' shaped recovery in the coming year.Most economists, including Federal Reserve Chairman Ben Bernanke, predict a slow and gradual upturn. To be sure, the telltale recovery signals have been flashing green lately. Factory output and new orders grew last month at the fastest pace in two years. These are what many state as "Green Shoots" in the recovery path of the economy.And with inventories of stores and manufacturers depleted, factories must soon ratchet up production just to restock. So, this is the way economists bet,the economy will grow to get out of recession, the 'U' shaped recovery, slow and painful recovery.
Now to the theory of a 'W' shaped recovery,the occurance of it,many believe is remote .The recovery will be muted, largely because consumers are in no mood to open their wallets. They have lost $13 trillion of wealth in the recession's housing and stock market crashes and appear determined to sock away any extra cash they have.The savings rate jumped to 5.2% in the second quarter from a low of 1% before the crisis. Consumer spending in the US accounts for 70% of the economy. So, any dip in consumer spending will greatly affect a dynamic, consumer centralized economy like the United States.
A small group of experts believes the economy will endure an unusual W-shaped, or "double-dip," recovery in which the economy falls back into recession before growing again.The massive liquidity, plus rising commodity prices, will increase inflation. Meanwhile, many believe the Fed reserve will be loath to raise interest rates to stave off inflation in 2010, because doing so could tamp down what will be a weak recovery in next year.So, these are the three major theories that is doing rounds in terms of recovery in global economy.
Whatever be the recovery path the economy takes, one thing that everyone comes to a consensus is that unless and until the US citizen starts spending again, the economical growth will not possible in a major way. There maybe green shoots or slight decrease in unemployment rate, but consumer confidence and higher spending are the ones which could lead a robust economical growth in the coming years.
