Many professionals and experts around the world believe that a true economic recession can only be confirmed if GDP (Gross Domestic Product) growth is negative for a period of two or more consecutive quarters. The roots of recession and its true starting point actually rest in the several quarters of positive but slowing growth before the recession cycle really begins. Often in a mild recession the first quarter of negative growth is followed by slight positive growth, then negative growth returns and the recession trend continues. While the “two quarter” definition is accepted globally, many economists have trouble supporting it completely as it does not consider other important economic change variables. For instance, current national unemployment rates or consumer confidence and spending levels are all a part of the economic system and must to be taken into account when defining a recession and its attributes.
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The agency that is officially in charge of declaring a recession in the United States is known as the National Bureau of Economic Research, or NBER. The NBER defines a recession as a significant decline in economic activity lasting more than a few months. We often do not receive official word of an economic recession until we are several months into it as NBER must take time to calculate the multitude of variables available before making their decision. While economic recessions are foreseeable, they generally are not detected until already in motion.
It is actually more common than you might realize for countries around the world to experience mild economic recessions. Recession (or contraction) is a natural result of the economic cycle and will adjust for changes in consumer spending and consumption or increasing and decreasing prices of goods and labor. Rarely though entirely possible, experiencing multitude of these negative factors simultaneously can lead to a deep recession or even long economic depression. Recession shapes are used by economists to describe different types of recessions. There is no specific academic theory or classification system for recession shapes; rather the terminology is used as informal shorthand to characterize recessions and their recoveries. The most commonly used terms are V-shaped, U-shaped, W-shaped, L-shaped recessions.
In a V-shaped recession, the economy suffers a sharp but brief period of economic decline with a clearly defined trough, followed by a strong recovery. V-shapes are the normal shapes for recession. There is a strong historical snap back relationship between the strength of economic recovery and the severity of the preceding recession. Thus, recessions and their recoveries have a tendency to trace out a V-shape.untitled.bmp300px-1953_recession_in_US.jpg
A U-shaped recession is longer than a V-shaped recession, and has a less-clearly defined graph. GDP may shrink for several quarters, and only slowly return to trend growth. Simon Johnson, former chief economist for the International Monetary Fund, says a U-shaped recession is like a bathtub: “You go in. You stay in. The sides are slippery. You know, maybe there’s some bumpy stuff in the bottom, but you don’t come out of the bathtub for a long time.”1.bmp
A W-shaped recession or “double-dip recession”, occurs when the economy has a recession, emerges from the recession with a short period of growth, but quickly falls back into recession.2.bmp
An L-shaped recession occurs when an economy has a severe recession and does not return to trend line growth for many years, if ever. The steep drop, followed by a flat line makes the shape of an L. This is the most severe of the different shapes of recession.
South Korea is one of the countries that had faced recession. South Korea is expected to undergo a U-shaped recession, meaning that the economy will be the bottom for a considerable period before it shows a meaningful recovery. Economists and policymakers said that recent economic data is indicating that Asia’s fourth-largest economy may have hit the bottom, but it is still unclear when it will bottom out due to its high dependence on overseas demand. Korea Institute of Finance(KIF) economist Shin Yong-Sang said that due to its export orientation, the Korean economy will not be able to rebound until other major economies get out of recession.
According to the Bank of Korea(BOK), Korea’s exports accounted for 55 percent of its gross national income(GNI) in 2008, up 11.2 percentage points from the previous year, and well above Britain’s 26.3 percent, Japan’s 22 percent and the United State’s 18.5 percent.
“With the economy relying heavily on overseas demand, it’s impossible to see a full recovery without an increase in exports,” Shin said, “Given the global slump and sluggish exports, Korea’s recession will likely continue for a while.” He pointed out that the March trade surplus was not an outcome of rising export demand bolstered by global recovery, but a recessionary surplus caused by plunging imports. “Stabilizing trends in industrial output and consumption are signals of the economy passing the worst, but they were mostly due to base effects from the prior month’s poor performance,” he said.
The nation’s trade surplus reached a record high of $4.6 billion in March, the largest monthly surplus since $3.8 billion in April 1998. Exports amounted to $28.3 billion last month, down 21.2 percent from a year earlier, while imports plummeted 36 percent to $23.7 billion. Industrial production fell 10.3 percent in February year-on-year. At a press conference, BOK Governor Lee Seong-Tae said that although some data points to a slowing of the economic downturn, downside risks to growth remain high. “The economy is unlikely to bottom out in the first half. GDP growth will be in negative territory this year, as exports are unlikely to turn around soon due to sluggish external demand, he said. Shin of KIF warned that if the economy stays at the current bottom level for a prolonged period, it’s highly probable that the economy will see another crisis in the second half and the financial soundness of local lenders will be tested again.
Another country that had faced recession is Canada. After months of resisting the inevitable, Canada has finally been pulled into recession by the worst global downturn since The Dirty Thirties. The Bank of Canada’s announcement that the domestic economy cannot continue to grow in the face of an ever deepening financial crisis comes amid predictions of staggering job losses for the fourth quarter of 2008 and a political crisis in Ottawa. Canada’s central bank also slashed its overnight rate three quarters of percentage point, to 1.5%, the lowest level since 1958 when John Diefenbaker was prime minister. The move is intended, in part, to prop up sinking consumer confidence and provide some much-need relief for key sectors such as forestry, mining and oil that have been particularly hard hit in recent months by a commodity bust.
Canada lost 71,000 jobs in November, most of them in the province of Ontario, where manufacturing sector has traditionally been a primary source of growth and prosperity. The single biggest monthly drop in a quarter-century is unlikely to be an isolated incident, and compares against 533.000 job losses for the same period in the U.S. “Indications are that job losses will be worse in December and early next year,” says Jayson Myers, president of Canadian Manufacturers & Exporters, the country’s largest trade and industry association whose membership includes automakers. Canadian manufacturers, including northern transplants of the Detroit Three and their suppliers, are suffering under the double burden of super-tight credit and unpaid receivables that is forcing them to burn through cash and capital in manner not seen in generations. Detroit North is asking for C$6.8 billion in government assistance, including C$800 million that GM Canada needs immediately to keep its lights on over the holiday season. Meanwhile, Canada’s major banks, which reported results for fiscal 2008 this month, continued to struggle with write-downs as a result of exposure to U.S. credit and equity markets. CIBC reported a loss of C$2.1 billion on the year, against net income of C$3.3 billion in 2007. The country’s fifth-biggest bank blamed write downs to its U.S. subprime portfolio for the huge loss. Adding political infighting to the global financial crisis may not be what Canada needs to bounce back from recession, but it signals that the country’s return to prosperity will be more difficult that most imagined just a few short months ago.