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One year on from the financial meltdown that rocked the global economy, the Financial Times has been reporting that the UK may be heading out of recession. The signs seem positive with industrial output, imports and exports increasing during the last quarter. 

Are these ‘green shoots’ giving us false hopes? Are they giving us an indication of the shape that this recession will take?  Be aware that the Bank of England, even as we write, is trying to dampen down any excess of exuberance … it asks us not to get carried away …

Typically recessions follow four shapes: V, U, W and L. But, this may be no ordinary recession. The conditions that contributed to the downturn, and the stimulus packages and quantitative easing methods put in place by Governments in response, mean that we could be witnessing a market correction that re-writes the rule book.

In a V-shaped recession, the economy experiences a sharp decline, followed by a sharp upturn. After the market bottom, recovery is relatively swift. Typically, emerging economies that are less reliant on credit markets follow this pattern.

This is also what the Government and industry hopes that we are experiencing. Chancellor Darling certainly hopes that the stimulus measures the Treasury has put in place will enable the UK economy to follow this curve.

A U-shaped recession is very similar, but the bottom is less defined. A recession following this pattern could see the market remaining in a state of flux for several years before there is a sustained upturn in the economy. This is how some more pessimistic analysts see things developing for the UK.

A W-shaped recession, also known as a ‘double-dip recession’, is characterised by a sharp decline in economic activity, followed by a short rebound that is not sustainable. The economy then falls back into recession again before slowly climbing out of it and then returning to growth.

An L-shaped recession is the most severe. This shape demonstrates an almost instant free fall in GDP, followed by a flat market for a long period of time.

In an L recession, markets may many take years, even decades, to return to pre-recession output levels.  The Japanese recession from the early 1990s, often referred to as the ‘lost years’, is a typical example of this.

So what shape will the recession follow? France and Germany have already announced that their economies have emerged from recession and are returning to growth, suggesting that they have followed a U-shaped pattern that we may now be mimicking.

Economist Nouriel Roubini, on the other hand, claims that the US and UK economies could be heading towards a W-shaped recession where economies relapse following a period of growth. The worry of many analysts is that commodity prices will rise on growth in the emerging world and then cut off developed world growth with a bout of inflation just as spending is being cut.

In his article in the Financial Times Roubini claimed that extracting fiscal stimulus, such as quantitative easing, from economies, coupled with rising oil, energy and food prices could create another economic contraction.

This begs the question whether France and Germany have called the end of their recessions too soon? The silence surrounding the troubles in the Eastern economies and the shenanigans over de facto protection of car manufacturing in the run-up to elections to the Bundestag do not suggest that all is as well in Middle Europe as may be being claimed.

Alternatively, we might experience a new shape for this recession, along the lines of the Nike ‘swoosh’, where decline is relatively rapid and growth very slow but sustained, albeit not at levels we have been used to. This is somewhere between the U and the L and might be regarded as a ’sustainable’ model in which policymakers put in safeguards that manage down ‘exuberance’.

All this speculation tells you something important – nobody knows! Even the statement that ‘gone are the days when businesses and consumers have easy access to credit and can afford to expand/live beyond their means and where high risk drives excessive rewards’ may be premature.

After all, a nice V-shaped recovery without time or a political consensus for reform might simply encourage politicians and bankers to ‘go for growth’, clean up a few obvious abuses and think they can go on as before. Yep! This might work but it might also lead us into an even more devastating crash further down the line.

The political focus seems to be on long-term, sustainable recovery but that gets hard to offer the world when several nations are trying to manage domestic electorates on different political cycles in a globalised economy.

The GM Europe deal shows how national interest will trump any attempt to share the pain of restructuring and the lack of economic co-ordination below Central Bank level until now is quite startling.  The current G20 Summit may change this lassitude but the signs are not good.

Whatever the shape that the recession in the UK economy takes, one thing is certain: the UK has enormous national debt levels that need to be plugged.

The argument for not starting the process of spending cuts and tax rises is ostensibly because such a policy might stop recovery in its tracks but the suspicion is that there is a political reason as well - it might stop the Government being given any chance of re-election.

If so, and the reckoning is merely being deferred, any faltering in recovery [W or L] after the election could prove a very serious matter indeed with no further funds to fall back on and a new Government forced into draconian policies to avoid a fiscal melt-down not seen since the 1930s.

Even if the UK economy corrects itself and returns to sustainable growth, no matter the shape of the recession, it will be the public who will be paying the price for many years to come.

As for business, the problem is uncertainty – a V-shaped recession suggests investment, an L-shaped one suggests retrenchment. The Bank seems to suggest that the cash is not there to lend if demand suddenly rises.  

Until an election is out of the way, the scale of the economic damage is known and we have a better perspective on this alphabet soup of possibilities, green shoots are likely to look a little stunted – weeds as much as flowers.