“ABC ... XYZ. Now I know my ABC, would you come and play with me?” This ABC infant song is probably something that most of us can relate to?
My wife claims to have learned her ABC in such ways, and by watching the popular kids’ programme – The Sesame Street.
Recently, three letters – U, V, W – have been widely used to describe the state of various economies and their prospects going forward.
It is not so much for what these letters stand for, but what their shapes resemble.
Let’s start with V. When a recession is referred to having a V-shaped recovery, that means it is generally shortlived and a quick rebounce is expected without complications.
So like V, markets fall continuously but when it hits the bottom, makes a sharp turnabout and heads back up. This does not, however, mean that the recession is not impactful. It just means that the recovery is fast and straight-forward.
A few recent examples would be the Asian Financial Crisis in 1997-98 and the SARS scare in 2003. In the former, high interest rates and collapsed local currencies caused many Asian economies to go into rapid decline.
Some even sought rescue packages from international bodies. Yet the region enjoyed a spectacular recovery in 1998. Similarly, SARS also had a significant impact on the economy. Moreover it brought on widespread fear among people over their health and their lives. Once again, when the worst had passed, the recovery was rapid and without doubt, spectacular too.
Unfortunately it is generally believed that this current round of recession will not experience a V-shaped recovery. That bring us to the next possibility.
The U-shaped recovery. The difference between U and V is that there is a relatively longer “bottom time” as the shape implies.
Hence the possibility of economies undergoing a longer period of no growth, or slow or negative growth. How long this bottom time is will depend on how fast the economies adjust to its environment.
This could be a likely outcome for us today. The bottom-time will depend on how fast economies de-leverage in areas such as credit comsumption in the United States, and also on how fast the economies re-leverage i.e. viable businesses and banks re-starting their lending activities which may spur economic activities.
In the meantime, government spending may tentatively replace the contracted consumer and corporate spending.
The risk here, however, is the possibility of W shaped recovery instead, with its double dips. In recent months, there seems to be some sort of recovery and greenshoots in select economies. While it is acknowledged that these are early signs and significant weaknesses remain, they are nonetheless positive signals.
The concern is that weaknesses such as unemployment, falling asset prices, contracting demands, etc, can still result in further economic contraction, resulting in the withering of these precious greenshoots.
Let me use an analogy. Recently, my son came under the weather and caught a cold. After a course of medication for three days, he seemed to be on the path to full recovery. We were relieved. On day four he sputtered a cough, and by day six he had lost his voice and had a raspy full blown cough!
It’s been another week and he’s his playful healthy self once again. This is a good example of a W-shaped recovery.
Let’s hope the global recession is simply undergoing a U shaped recovery, where we are already seeing those tentative signs of recovery after a prolonged period of no/negative growth.
If it was a W shaped recovery, then it means that the recent positives may be overweighed by negatives to come.
U, V or W, economies will recover, definitely. For those who have missed the market rally recently, there is still likely a second chance.
Since a V-shaped recovery is unlikely given the systemic flaws in many markets, the possible U or W shaped recovery means that opportunities may still be available. Just don’t wait till the skies are clear before investing, as stock markets will rise before the real economies rebound.
As my son learns his ABC song, I’m re-learning my UVW. I guess when we all get to XYZ, we know that we can then all go out to play!
Tay is senior vice-president and senior head of UOB’s personal financial services division.
My wife claims to have learned her ABC in such ways, and by watching the popular kids’ programme – The Sesame Street.
Recently, three letters – U, V, W – have been widely used to describe the state of various economies and their prospects going forward.
It is not so much for what these letters stand for, but what their shapes resemble.
Let’s start with V. When a recession is referred to having a V-shaped recovery, that means it is generally shortlived and a quick rebounce is expected without complications.
So like V, markets fall continuously but when it hits the bottom, makes a sharp turnabout and heads back up. This does not, however, mean that the recession is not impactful. It just means that the recovery is fast and straight-forward.
A few recent examples would be the Asian Financial Crisis in 1997-98 and the SARS scare in 2003. In the former, high interest rates and collapsed local currencies caused many Asian economies to go into rapid decline.
Some even sought rescue packages from international bodies. Yet the region enjoyed a spectacular recovery in 1998. Similarly, SARS also had a significant impact on the economy. Moreover it brought on widespread fear among people over their health and their lives. Once again, when the worst had passed, the recovery was rapid and without doubt, spectacular too.
Unfortunately it is generally believed that this current round of recession will not experience a V-shaped recovery. That bring us to the next possibility.
The U-shaped recovery. The difference between U and V is that there is a relatively longer “bottom time” as the shape implies.
Hence the possibility of economies undergoing a longer period of no growth, or slow or negative growth. How long this bottom time is will depend on how fast the economies adjust to its environment.
This could be a likely outcome for us today. The bottom-time will depend on how fast economies de-leverage in areas such as credit comsumption in the United States, and also on how fast the economies re-leverage i.e. viable businesses and banks re-starting their lending activities which may spur economic activities.
In the meantime, government spending may tentatively replace the contracted consumer and corporate spending.
The risk here, however, is the possibility of W shaped recovery instead, with its double dips. In recent months, there seems to be some sort of recovery and greenshoots in select economies. While it is acknowledged that these are early signs and significant weaknesses remain, they are nonetheless positive signals.
The concern is that weaknesses such as unemployment, falling asset prices, contracting demands, etc, can still result in further economic contraction, resulting in the withering of these precious greenshoots.
Let me use an analogy. Recently, my son came under the weather and caught a cold. After a course of medication for three days, he seemed to be on the path to full recovery. We were relieved. On day four he sputtered a cough, and by day six he had lost his voice and had a raspy full blown cough!
It’s been another week and he’s his playful healthy self once again. This is a good example of a W-shaped recovery.
Let’s hope the global recession is simply undergoing a U shaped recovery, where we are already seeing those tentative signs of recovery after a prolonged period of no/negative growth.
If it was a W shaped recovery, then it means that the recent positives may be overweighed by negatives to come.
U, V or W, economies will recover, definitely. For those who have missed the market rally recently, there is still likely a second chance.
Since a V-shaped recovery is unlikely given the systemic flaws in many markets, the possible U or W shaped recovery means that opportunities may still be available. Just don’t wait till the skies are clear before investing, as stock markets will rise before the real economies rebound.
As my son learns his ABC song, I’m re-learning my UVW. I guess when we all get to XYZ, we know that we can then all go out to play!
Tay is senior vice-president and senior head of UOB’s personal financial services division.