What is a Double Dipped Recession?
There are rumors and bigger rumors, but 2010 for many people involved in economics has been the year more experts are openly discussing the possibility of a double-dip recession. What is a double dip recession?
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What is a Double Dipped Recession?[/caption]Economists tend to call recessions by their shapes. There are V, W, L and U shaped recessions- a double-dip recession is a W shape. Those who are familiar with reading charts may understand its significance, but to the layman still puzzled by the terminology.
A double-dipped recession is:
An economy falls into recession, emerges from it for a short period of time then falls back into a recession again, forming a W shape on a chart- rather like a store that has less customers, then some return but a few months later, until the store starts seeing less customers again.
Double- dipped recessions are different as most economic recoveries traditionally are V-shaped- when economic growth falls, but then recovers sharply after a brief period of stagnation.
According to official statistics most countries are starting to recover, and are forming a V-shaped recession.
Past examples of a double-dipped recession
One example of a double-dipped recession was in the early 1980's in the United States. For a period of three months from April to June 1980, the economy shrank by an estimated 8% of GDP. Then it leveled out between January to March 1981, and later grow by an estimated 8.4%.
The Federal Reserve feared renewed inflation, raised interest rates, leading to a dip back into recession, then the economy grew again- partly because of supply-side economics but also increasing Government borrowing adding to the nation's deficit.
2010- A different type of W-shaped recession
However the early 1980's is different to most economies today. There was no mass banking crisis or mortgage crisis as in 2008, nor has the economy of the World been as global.
The double-dip recession many speak of today, could be much deeper than in the 1980's, and there are several significant reasons:
- Traditionally during a recession governments stimulate the economy, then after a period, the private sector take over. This has still not happened in many countries, where economic growth is still largely stimulated by government investment.
- The scale of government debt in 2010 is much higher than in 1980. In fact some experts state that the US alone owes over 93% of its GDP or a staggering 13 trillion dollars.
- Many businesses in the private sector are still struggling, some larger Corporations are heavily indebted after government bailouts. These businesses have to expand and invest in order to offset any drop in governmental assistance to the economy.
If the United States and some other countries like Japan, the UK and most nations in Southern Europe fall back into recession. Their Governments cannot borrow to stimulate their economies again. Private investors and companies have to fuel a recovery, rather than a Government.
This could mean a W-shaped recession could be much deeper than in the early nineteen eighties, and would have to be stimulated by the private sector. One reason most economists are looking at the growth and investment in the economy by this sector.
If the growth in private business and investment is less than, the investment needed to pull out of a stagnating economy. We could see the start of a double-dip or W-shaped recession. A recession some say could be deeper, and more prolonged than in many previous economic downturns.
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