How the economic recovery will be different this time

  • Describe how the different types of recessions impact the economy
  • Explain the way the economic recovery is likely to impact asset prices
  • Identify the inflation threat to the UK economy
How the economic recovery will be different this time

There are generally regarded as being three distinct types of recession, according to Nathan Sweeney, multi-asset fund manager at Liontrust

He believes the three types of recession are “cyclical”, “structural”, and “event driven.”

Cyclical recessions are often very mild, with the majority of citizens' lives not impacted. Examples of such recessions include one at the start of the Millennium when dot com stocks sold off. Typically they occur after a period of strong growth and low unemployment, which then reverses. 

Structural recessions happen when a major flaw in the construction of the economy is exposed; an example of such a recession was the 2007 financial crisis, when the prolonged and pronounced mis-pricing of mortgages and of property assets was revealed.

Structural recessions tend to take a long time to repair, and to have a broad based impact on society, as the part of the economy which has been upended must be fixed, while the consequences of the implosion are still happening. 

Event driven recessions happen when one-off or exceptional events that are not directly part of the economy occur, but have a significantly negative impact on it, and on wider society.

Event-driven recession

The pandemic is an example of an event-driven recession, as it impacted all economies negatively, regardless of the condition of those economies when the event happened. 

Sweeney says that while event-driven recessions tend to be far more severe, they are also typically shorter, and with a much deeper bounce back, as when the event goes away, the economy can return to something like its pre-recession condition. 

David Page, head of macroeconomic research at Axa Investment Managers, says that many recessions which are labelled “event-driven” are really cyclical in nature, as the event merely brought a cycle to an end, and if that event had not done so, something else would have at around the same time.

He believes Covid is different, as it would likely have led to a recession no matter at what point in the cycle economies are.

Page had been expecting a cyclical recession in the UK and globally towards the end of 2019, but the pandemic changed the shape of the recession that has come.

He says: “Obviously the major difference between this recession and a more typical one is the scale, this is the worst downturn in hundreds of years, and when we speak with clients about it, all agree there will be a strong bounce back later this year, but after that? No one is sure.” 

Page says the two central considerations are what level of “scarring” is left behind, that is, despite this being an event-driven recession, even when the event vanishes from the public consciousness, there will be “scarring” left behind, from jobs lost and businesses collapsed, even if the more typical scarring of a recession, such as high debt levels, are not prevalent this time.