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Will economic recovery be a U, a V, an L or a W? How businesses can prepare for any economic shape

business owner

As the world continues to endure the coronavirus (COVID-19) pandemic’s negative effects, many businesses are looking toward recovery. However, economists do not agree on exactly what shape economic recovery will take: will it be a U, a V, an L, a W or some other pattern of recession and rebound? The following explains what those economic recovery shapes mean for businesses and what companies can do now to recession proof, survive and thrive no matter how the economy shapes up.

The diverse shapes of recovery: What they mean for businesses

Forecasting post-pandemic economic recovery trendlines is difficult for even the most seasoned economists. Unlike other historical periods of market contraction and growth, the current economic climate is not driven by natural economic forces. Rather, it is the consequence of a deliberate shutdown, so it’s impossible to completely rely on historical precedent. That doesn’t mean companies can’t prepare, however, and preparation begins with understanding the different shapes recovery might take and how they could impact businesses.

U shape

In a U-shaped recession and rebound, the economy shrinks over several quarters, then gradually begins to grow. The trendline, then, takes the shape of a “U.” Historically, a U-shaped recession and recovery lasts one to two years.

For context, the 1973 – 1975 recession was U-shaped. Considered one of the worst recessions in U.S. history, it was brought on by factors such as increasing oil prices, Vietnam war spending and a preceding stock market crash.

A Reuters poll revealed that just under 50% of economists believe the coronavirus recession and recovery will follow a U shape, while Upfina reports that 52% of investors predict a U-shaped recovery.  A U-shaped recovery is more likely if there is a gradual return to work and spending, which would mean businesses must prepare for a prolonged recession and a slow recovery period that could take months or even years to return to pre-coronavirus levels.

V shape

Unlike a U-shaped recession, where the economy dawdles around the bottom of the curve before it begins a slow recovery, a V-shaped recovery is mapped by a sudden downward trend followed by a quick comeback. The entire recession and rebound period is much quicker, typically taking around six months to a year to cycle through.

The 1953 – 1954 recession, caused by factors such as increased interest rates and changes in government policies after the Korean War, is a notable example. It lasted only ten months, as the economy rebounded once the Federal Reserve reversed its stance on certain anti-inflation policies.

Many are hopeful for a V-shaped recovery, which would return the economy to pre-pandemic levels quickly and enable businesses that are able to weather a severe, yet short-lived, storm to thrive within a year.

L shape

An L-shaped recession starts out like a V-shaped recession, where trendlines quickly plunge, except it bottoms out rather than rebound to form the shape of an “L.” It’s the most economically devastating recession, and recovery can take as long as a decade or more – if it ever happens at all. In some cases, an L-shaped recession is referred to as a “depression.”

Japan’s “lost decade” is an oft-cited example of an L-shaped recession, predicated by a market crash and credit woes that plagued the country throughout the 1990s. Though most economists are more optimistic about the coronavirus recession and recovery, some believe it’s possible current conditions will serve as catalysts for a “Greater Depression.”

If that happens, businesses might need to make significant and lasting changes to maintain operations or even pivot and relaunch to meet new market demands in an uncertain economic environment.

W shape

A W-shaped recovery starts out like a V-shaped recovery, but a brief period of growth is disrupted partway through rebound to create a second recession period that quickly gives way to sustained recovery. The trendline forms the shape of a “W,” which is why it’s sometimes referred to as a “double-dip” recession.

Such a recession hit the U.S. in the early 1980s, when an oil crisis and inflation caused the economy to falter. Though it quickly rebounded, increasing interest rates intended to combat inflation created a second dip before the economy experienced sustained growth. The entire contraction and expansion cycle lasted nearly two years.

If there is a resurgence of the virus – perhaps in early winter – the economy could experience a W-shaped recession and recovery. Many businesses could be at risk of failure because they did not have time to recover from the first dip, which means companies would be wise to cut costs, stockpile cash reserves and keep a close eye on cash flow even if the economy does rebound.

Other recovery shapes

Recovery could follow different paths than those listed above. Examples include:

  • Swoosh/tick mark: Named for Nike’s famous logo, a “swoosh” recovery would be less severe than an L-shaped depression, but it would still result in a slow recovery period
  • WW-shaped: A sustained period of undulating economic conditions that result in a series of ups and downs
  • Inverted square root: In this scenario, the economy would bottom out and quickly rebound, but would stagnate before reaching pre-pandemic levels
  • J-shaped: Essentially a U-shaped recovery, but where the economy continues to grow at a rapid pace after reaching pre-pandemic levels
  • Wheelbarrow shaped: Another version of a U-shaped recovery, but in this case the trough is larger so the recession lasts longer

What shape will coronavirus economic recovery take? At this point, no one knows for certain. Varying forecasts, revealed in the Reuters poll, suggest anywhere from a 6% economic decline to a 0.7% growth, with an average prediction of a 1.2% contraction. Smart businesses will prepare for any scenario so they can survive and even thrive no matter how the economy responds.

Woman reviewing business finances

5 ways to prepare for any “letter”

Though recession-proofing a business might be a cliché that’s impossible to achieve in practice, there are certainly measures businesses can take to mitigate risks and prepare for survival during an economic downturn. With a strategic plan, businesses can prepare for the worst and hope for the best – and in doing so, position themselves to thrive once the economy rebounds. The following tips can help businesses protect themselves from unstable market conditions.

1. Project cash flow and make necessary adjustments

Companies should forecast cash flow over the next several months – and even years – to help determine whether they’ll be able to maintain operations during recession and recovery. It’s a good idea to make projections against several different scenarios, including each type of recovery shape, to ensure enough cash is on hand to survive.

Companies should account for the following in their projections:

  • Accounts payable
  • Accounts receivable
  • Payroll and taxes
  • Inventory and supply
  • Forecasted sales
  • Marketing expenses
  • Variable expenses
  • Rent and utilities
  • Mortgage, commercial loan and vehicle fleet payments
  • Additional overhead, such as insurance costs and any other expenses

If potential shortages are identified, businesses can adjust before those shortages become critical issues.

2. Reduce or eliminate costs

Now is also a good time for companies to review their budgets, cut back where they can and eliminate expenses where possible. Some areas businesses can reduce or eliminate costs include:

  • Supply chain and sourcing: Businesses can look for closer, more reliable and more affordable suppliers or negotiate better terms
  • Utilities: Companies can seek alternatives with better pricing and consider energy efficient lighting
  • Travel: Reduce or eliminate business travel in favor of video conferencing and other alternatives
  • Employee perks: Gym memberships, coffee and water services, childcare, company vehicles and other perks can be suspended or eliminated
  • Benefits: Businesses can identify more affordable benefits or reduce offerings to maintain operations
  • Workforce: Companies can allow employees to work at home to reduce staffing-related costs. They can also move some employees to part-time and let non-essential employees seek employment elsewhere. Another option is to outsource where possible to reduce ongoing overhead
  • Accounts payable: Businesses can negotiate new repayment terms that allow them to make lower payments over more time and maximize cash reserves
  • Equipment: Companies should consider terminating leases on unused equipment
  • Mortgages and commercial loans: Suspending payments helps businesses stockpile cash reserves in anticipation of an economic downturn
  • Non-essential and luxury expenses: Companies should evaluate all expenses and eliminate those that are not essential to operations. Luxury expenses – those that are for vanity or are otherwise unnecessary perks – should likewise be cut

3. Liquidate

In addition to cutting costs, businesses can consider liquidating unnecessary assets to bolster cash reserves. Doing so will help them maintain solvency during an economic downturn and position them for success during the rebound. Potential targets include:

  • Inventory: Companies can sell excess inventory in bulk rather than waste resources on retail sales, especially if unsold inventory is less profitable than other merchandise
  • Real estate: Businesses can sell unused or unnecessary real estate to help fill their coffers fast
  • Vehicles: Company vehicles represent significant expenses for some businesses. In addition to monthly payments, they require ongoing maintenance, fuel and insurance. Selling unneeded vehicles can help build cash reserves and eliminate unnecessary expenses
  • Equipment: Businesses can sell equipment they rarely use, especially if it makes more financial sense to outsource certain services when the equipment is needed

4. Be flexible

Though the previous tips focused on saving money, it’s important for companies to continue making money during the recovery period. For some, that means being flexible enough to withstand market fluctuations. Considerations for a post-pandemic world include:

  • Diversify: Businesses should seek opportunities to diversify their offerings so all their eggs aren’t in one basket. Careful evaluation of market trends and predictions can help companies identify new and underserved opportunities to remain relevant once the crisis ends
  • Pivot: Taking it a step further, companies should consider whether their current offerings are strong enough or whether new opportunities exist to pivot toward more profitable endeavors. It’s important to keep abreast of shifts in consumer behavior to discover growth opportunities, especially in sectors most heavily impacted by the coronavirus. For example, restaurants that pivot toward a delivery model and allocate marketing resources to promoting it might have distinct competitive advantages
  • Partner: Businesses can investigate opportunities to partner with other companies to increase their reach. Ideal partners share the same audiences but do not directly compete; this type of flexibility not only improves exposure, it also enables companies to share marketing and, potentially, supply and shipping costs
  • Expand: Though expansion might be the last thing many companies are thinking about, those that have the means can take advantage of the opportunity to purchase competing businesses and increase their market share. This is especially true now, when many companies are struggling and would rather cash out at below market value than risk failure

5. Promote heavily (and affordably)

Continued marketing is critical for survival, even during a recession; and it also serves as a springboard for success during a market rebound. Businesses don’t need to break the bank to continue promoting their products and services, but they do need to stay in front of customers. Here are some idea

  • Seek affordable marketing opportunities: Companies can focus on inexpensive marketing channels such as social media, email marketing and on-site content to engage customers for minimal investment. Doing so can also add a human element to marketing efforts that endears customers to businesses long after the crisis ends
  •  Hold discount sales: Businesses can empathize with cash-strapped customers and hold their best discount sales during recovery. The benefits to good sales are multiple: low prices attract customers who are concerned about their own finances, they help maintain cash flow no matter what the economy is doing, and they can encourage customers to keep patronizing businesses post-pandemic
  • Foster customer loyaltyBusinesses with loyal customer bases are well-positioned to survive and thrive during and after recovery. Companies, then, can work to establish customer loyalty programs, help customers solve problems through value-added content and, ultimately prove to be resources customers can count on to help them get through tough times

No one knows exactly what the future holds or what shape recovery will take – U, V, L or W – but businesses would be wise to act now rather than react later. In addition to the tips outlined here, companies should develop emergency response plans that outline exact steps they’ll take if a resurgence of the virus shuts down the economy again. A strategic plan coupled with smart money management can help businesses outlast COVID’s effects and thrive in a new economy.

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