Now that US recession is a racing certainty, the debate has moved on to the shape of things to come.
V-shaped, good: a short, sharp downturn with a speedy recovery. Those who were last year telling us that all was enduringly rosy have tended to move towards this letter of the alphabet in describing the forthcoming downturn. W-shaped: a double dip. U-shaped, or Martin Sorrell’s bath-shaped or even saucer-shaped variant: a more protracted period spent at the bottom.
And most feared of all, the Japanese influenced L-shaped recession: a lasting period of stagnation, bordering on economic depression.
Nouriel Roubini considers the options. His view is that we’re headed for a U-shaped downturn, with the contraction lasting 12 to 18 months through to the middle of 2009. The US, he adds, is experiencing the worst housing recession since the Great Depression, the US consumer is shopped-out and debt-burdened, and losses that started in the subprime meltdown will spread across the financial landscape in the coming slump.
One cannot rule out a W-shaped experience either. That largely depends on whether the tax rebate received by US households in the middle of 2008 is saved or consumed.
But the notoriously bearish Roubini doesn’t think the US is in for the ultimate L.
My view is that a protracted economic stagnation – bordering on an economic depression – is unlikely in the case of the US as the policy response of the US is already more aggressive than the one of Japan…..Also Japanese postponed the necessary corporate and banking restructuring for years keeping alive zombie firms and zombie banks via inappropriate forms of forbearance. In the US both private and especially public efforts to restructure the impaired assets and firms will start faster and more aggressively. Thus the risk of a decade-long economic stagnation is quite limited so far.
Roubini though is betting on the “most severe recession and financial crisis that the US has experienced for decades,” while markets are still pricing in a relatively mild downturn. Calculated Risk picks up his thread, but is slightly more positive about the potential for employment to hold up.
Either way, it’s all going pear-shaped.