What Is a W-Shaped Recovery?
A W-shaped recovery symbolizes an economic cycle of recession and recovery that closely resembles the letter ‘W’ in chart representations. This pattern is evident in certain economic indicators such as employment, gross domestic product (GDP), and industrial output.
A W-shaped recovery involves a sharp decline in these metrics followed by a quick upward spike, then another sharp decline, and finally a second recovery. The middle segment of the ‘W’ typically signifies either a significant market rally or a recovery curtailed by another economic downturn. This pattern is also known as a double-dip recession.
Key Features
- A W-shaped recovery occurs when an economy traverses from recession to recovery and quickly reenters into another recession.
- On charts, major economic performance indicators sketch the letter ‘W’ during this type of recession.
- Also known as a double-dip recession.
- These recoveries are notably challenging because the brief recovery period can mislead investors into premature investments.
Understanding the W-Shaped Recovery
W-shaped recoveries are characterized by high volatility compared to other recovery types. There are multiple patterns recessions and recoveries could follow. Well-known patterns include shapes resembling letters such as ‘V,’ ‘W,’ ‘U,’ and ‘L.’ Each pattern reflects the general curve of the recovery chart, tracing key economic health metrics.
Initial economic downturns in W-shaped recessions resemble V-shaped recoveries but soon relapse due to another decline before stabilizing. They are therefore called double-dip recessions—the economy descends twice before reaching full recovery.
Historical Examples
A prime historical example is the U.S. economy in the early 1980s. From January to July 1980, the U.S. experienced its first recession phase, followed by nearly a year of recovery, before entering a second recession from 1981 to 1982.
Repeating market sentiment shifts are typical during economic phases like recessions or recoveries. This cycle is a natural part of economic dynamics influenced by new information releases. Broadly, sudden alterations in consumer or corporate actions induce substantial impacts on markets and economic states.
A recent example is the COVID-19 pandemic, which saw economies efficiently climbing after mid-year announcements of vaccine availability and enactments, but subsequently fluctuating due to new virus waves and governmental policy shifts.
Looking further back, the European debt crisis (2010-2014) exhibited a notable W-shaped recession. The crisis, an outgrowth of the Great Recession, revealed high government debt levels and reduced investor confidence contributed to economic decline, temporarily recovering as immediate issues abated, then dipping further due to additional financial and governmental interventions.
What Is a Double-Dip Recession?
A double-dip recession describes a phenomenon where recovery is short-lived, and the economy sinks back into a recession. Such incidents are not rare as evolving data reshapes investor confidence and market behaviors, inducing subsequent recessions following initial recoveries.
What Is a Double Bottom Pattern?
Technical analysts utilize the double bottom pattern, a W-shaped trend marked on charts to indicate the reversal of primary economic trends applicable to stocks, major market indexes, and larger economic cycles.
Most Common Reversal Patterns
Technical traders often rely on several common patterns to highlight major trend shifts. Notable patterns include the double bottom, double top, triple bottom, triple top, head-and-shoulders, and cup-and-handle. Generally, reversal patterns take the shapes ‘V,’ ‘W,’ or ‘U.’
Conclusion
A W-shaped recovery outlines an economic journey through a recession and partial recovery, with charts forming a ‘W’ configuring multiple economic indicators such as employment, GDP, and industrial output. The term is synonymous with a double-dip recession, revealed via dropping and rallying measurements and often resulting in major bear-market rallies or second economic troubles before achieving recovery. Relapses in economic trends are typical during this pattern.
Related Terms: double dip recession, V-shaped recovery, economic cycle, bear market, volatility.
References
- National Bureau of Economic Research. “U.S. Business Cycle Expansions and Contractions”.
- The Guardian. “Weakest Eurozone Economies on Long Road to Recovery”.
