Out of Control Policy Blog

Will We Have a LUV Recovery?

At the recent World Economic Forum policy-makers discussed what kind of recovery the global economy will be looking at. Some suggested the acronym LUV would be a good description: A conventional V recovery in Asia, a more sluggish U recovery in the United States and an L recovery in Europe, illustrating the shape of the growth curve going into and coming out of the recession.

Many other suggestions have been made, though. Some worry there will be a double-dip recession for the U.S. and even for the world economy. Such a scenario is usually referred to as a W recovery, illustrating the two ups and two downs. This is not unlike what happened in the U.S. in the 1930s as both fiscal and monetary tightening in 1936 triggered a "depression within a depression" in 1937-38.

Others have suggested that we will see a “square root recovery”, i.e. a V recovery in which the rebound breaks off and then flattens out at a much lower growth rate than before the crisis, as illustrated by the second leg of the square root symbol.

Simon Ballard, an analyst at RBC Capital Markets has come up with a similar metaphor for what he thinks the British recovery will look like: an “Eddie the Eagle” recession. This would be a sharp fall, then a gentle rise, before flat-lining. Eddie the Eagle was a British ski-jumper who famously finished last in two competitions at the 1988 Calgary Winter Olympics.

Kevin Harrington of Clarium Capital Management thinks the ski-jump metaphor is applicable to the U.S. as well, as the fiscal stimulus will only give a short term rise, before creating a new set of problems that will impact the economy later on:

“If we have a recovery at all, it isn’t sustainable. This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”

Several commentators also worry that the Chinese V recovery, the last part of the above LUV acronym, is nothing but a short spurt. Massive monetary stimulus has created a severe credit and asset bubble that most likely will end sometime this year as the Chinese authorities are trying to deflate it. Whether this will be a hard or a soft landing, is hard to tell, and the end of the boom could signal a new global downturn.

When the Chinese central bank started to tighten earlier this year, new fears arose as to the fragile state of the world economy and what actual growth projections for the Chinese economy should look like. Robert Pavlik, a market strategist at Banyan Partners, said: "This is creating some concern here that they might slow down their economy so much that it impacts the global rebound."

Underlying the self-congratulatory tone among Western policy-makers when speaking on the stimulus “success” story at this year’s World Economic Forum, there was a feeling that something may yet go terrible wrong. As Gideon Rachman of the Financial Times reported:

“[T]here is the fear that economic disaster may only have been pushed further into the future rather than avoided altogether. The massive fiscal stimuli unleashed in the US, China and the European Union will have to be reined in at some point. But this is a tricky business. There is a fear that if spending is cut too soon, economies could fall back into recession. But if loose money policies are continued for too long, they could simply stoke new speculative bubbles of the sort that popped so disastrously in 2008. Meanwhile, there is a background concern that unemployment will stay stubbornly high for an alarmingly long period.”

As fiscal and monetary stimulus is phased out and as the Chinese economy is likely to slow down, this could very well mean that what we will see in the near future is a W, or double dip recession, in which the second rising leg of the W will flatten off into an Eddie the Eagle recovery, not only for Britain, but for the world economy.

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