Visions of U or W Shaped Recession

There are few better ways to sink one's hopes about the future than to read pessimistic economists. In that spirit, Nouriel Roubini in the Financial Times and Paul Krugman in his New York Times blog write yesterday and today, respectively, about the likelihood that the Great Recession is U shaped or even (in Roubini's case) W shaped. Both see a U shaped recession as probable, and Krugman shows, with this chart, what a U shaped recession looks like and why that means a jobless recovery - aka "purgatory" -


Furthermore, Roubini sees a very real possibility of this recession being W-shaped, which would be very bad news indeed:

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession.