W-shaped recovery

Also called: Double-dip recession, W-shaped recession · Topic: Economic Growth Theories and Business Cycles · NCERT: Beyond NCERT

Meaning

A W-shaped recovery (also called a double-dip recession or W-shaped recession) is a pattern where output falls, rises for a short time, falls again into a second recession, and only then recovers for good. On a graph of GDP, this path looks like the letter W.

It matters because the first rebound can be misleading. A country may look like it is "out of the crisis", but a second shock can push it back down. Each dip also adds to the long-term damage to jobs, firms and investment.

Explanation

How the W forms

• Business cycle: the repeated rise and fall of economic activity around its long-run trend (the path the economy would follow in normal times).
• Recession: a fall in real output (real GDP) over a period.
• Trough: the lowest point of output.
• A W has two troughs, with a short recovery between them: 1. First fall: a shock pushes output down (first trough). 2. Brief rebound: output starts rising again. 3. Second fall: a new shock cuts the recovery short (second trough). 4. Final recovery: output rises again, this time for longer.

What causes the second dip

• Policy tightening too early or too hard:
• the central bank raises interest rates sharply → loans become costlier → firms and households borrow and spend less → demand falls again.

• US 1980-82: the US central bank raised interest rates sharply to control inflation. This caused a second recession, which is the standard example of a W.

• A new wave of the same shock:

• for example, a new wave of infection → fresh restrictions → shops, travel and factories slow down again.

• Weak base under the first rebound:

• if the first recovery comes only from a base effect (a high growth rate because it is measured on a smaller base after a deep fall), and not from lasting demand, it can break easily.

Why the second dip hurts more

• Scarring (long-lasting damage to the economy's ability to produce) builds up with each dip:
• workers lose jobs and skills;
• small firms that just survived the first fall may now close;

• investment is postponed again, so the capital stock stays lower.

• Harrod-Domar link: growth rate g = s / v, where s is the saving rate and v is the capital-output ratio (how many units of capital are needed to make one unit of output).

• A second dip cuts saving and investment again → less capital is added → growth stays slower for years.

• Example from the growth model: s = 30% and v = 4 give g = 7.5%. If s falls to 24%, g falls to 6%.

• Hysteresis (a temporary shock that causes a permanent loss in the output level): if the damage is deep enough, the trend line itself moves down. The final arm of the W may then never reach the old trend.

• Solow (1956) link: in the Solow model, an economy hit by a temporary shock returns to its steady-state growth path (the long-run path where growth comes only from technology and labour). A W shows that a second shock can delay this return, and scarring can lower the path itself.

Worked example (illustrative index, not real data)

• Pre-crisis GDP = 100.
• First fall: GDP drops to 94 (first trough).
• Brief rebound: GDP rises to 98. Growth looks strong, but output is still below 100.
• Second fall: a policy tightening pushes GDP down to 95 (second trough).
• Final recovery: GDP climbs to 101.
• Reading it:
• The level is finally back above 100, but only after two falls.
• If the old trend was rising every period, the gap between actual output and the trend (the output gap) is wider than it would have been after a single V-shaped fall.

In India

• No official W for India in 2020-22. The Economic Survey 2020-21 (January 2021) called India's path a "V-shaped recovery" from July 2020 [1].
• Q1 2020-21 (April-June 2020): GDP fell 23.9% because of the national lockdown [1].
• Q2 2020-21 (July-September 2020): GDP fell only 7.5% [1].

• The Survey projected real GDP growth of 11% for 2021-22 [1].

• Why W-risk still matters for India:

• The two classic triggers of a second dip are a new wave of infection and early policy tightening. Both were live risks after the first rebound.

• A W is also why a strong growth rate alone is not proof of recovery. Real GDP contracted 5.8% in 2020-21 and grew 9.1% in 2021-22 (First Revised Estimates, February 2023) [5][6]. Yet at the Provisional Estimate stage (May 2022), 2021-22 output was only 1.5% above the 2019-20 level [4].

• Tools used to prevent a second dip:

• RBI:
  • repo rate cuts (the repo rate is the interest rate at which the RBI lends money to banks for a short time);
  • a moratorium, which let borrowers delay loan repayments for some months without being marked as defaulters;
  • TLTRO (Targeted Long-Term Repo Operations), long-term funds given to banks at the repo rate, which banks had to put into specific areas such as corporate bonds.
• Government: the Emergency Credit Line Guarantee Scheme (ECLGS) was launched in May 2020 under the Aatmanirbhar Bharat Abhiyan [3]. The government guarantees bank loans to MSMEs, so firms can survive a shock instead of closing.
  • Guarantees of ₹3.61 lakh crore had been issued, benefiting 1.19 crore borrowers (as of 31 January 2023) [2].
• These measures keep firms alive through the shock. That limits the scarring that makes a second dip deeper.

Don't confuse with

• V-shaped recovery: one sharp fall and one quick rebound to the pre-crisis level and trend. A W has two falls, because the first rebound is cut short.
• U-shaped recovery: one fall, then a long flat bottom before a slow return to trend (US 1973-75). A U has one trough. A W has two.
• L-shaped recovery: a steep fall, then long stagnation that never regains the old trend (Japan after 1990; Greece after 2010). A W does recover in the end. An L does not.
• K-shaped recovery: a divergent recovery where some sectors and groups rise while others keep falling. K describes who recovers (distribution). W describes how many times the whole economy falls (the path over time).

Prelims Hooks

• W-shaped recovery = double-dip recession: fall → brief rebound → second fall → recovery.
• Standard example: US 1980-82, when the US central bank raised interest rates sharply to control inflation and caused a second recession.
• Common triggers of the second dip: policy tightening (such as a sharp interest rate hike) or a new wave of infection.
• Trap: the Economic Survey 2020-21 called India's COVID recovery V-shaped, not W-shaped [1].
• Trap: a high growth rate after a fall does not mean the lost output has been recovered. Part of it is a base effect.
• Match the shapes: U = long bottom; L = no return to the old trend (Japan after 1990); Swoosh = sharp fall, slow climb; K = divergent recovery that widens inequality.

Mains Points

• Timing of the exit from stimulus:
• Withdrawing support too early can turn a V into a W. In the US in 1980-82, a sharp rate hike to control inflation caused a second recession.

• This is a GS-III trade-off between controlling inflation and protecting growth. It supports counter-cyclical policy (spending more in bad times and less in good times) over early fiscal or monetary tightening.

• Each dip adds scarring:

• A second fall hits firms and workers who are already weak: MSMEs with little cash, informal workers and contact-intensive services.

• Credit guarantees such as ECLGS (₹3.61 lakh crore of guarantees for 1.19 crore borrowers by January 2023) [2] and the RBI moratorium aim to keep firms alive, so that a second shock does not become permanent damage (hysteresis).

• Reading recovery data carefully:

• A good quarter or year after a fall can be a base effect, not a lasting recovery. India's 2021-22 output was only 1.5% above 2019-20 (Provisional Estimates, May 2022) [4].
• Policy should track the level and trend of output, and not only the growth rate, before support is withdrawn. Otherwise a fragile rebound can end in a second dip.

Related concepts

• V-shaped recovery
• U-shaped recovery
• L-shaped recovery
• Swoosh-shaped recovery
• K-shaped recovery

Read more

• Shapes of recovery