What is... | August 25, 2015

What is a double-dip recession?

Stories about a double-dip recession hit the headlines in Italy in 2012. In 2013, the same was true in Ireland. The eurozone, meanwhile, was in a double-dip for 18 months from 2012.

This talk of double-dips refers to an economy that has been in recession and emerges from it for a short time, only to return to a downturn.

W-shape recovery
A popular, technical definition of a recession is two consecutive quarters of negative growth in gross domestic product (GDP). Under this definition, a recovery begins when growth returns. More about recessions (including the difference between a recession and a depression) is here.

A double-dip may come after that, if an economy slips back into recession again. It is also called a “W-shape” recovery, describing the pattern made if plotting the growth on a line chart. If the cycle repeats, it becomes known as a triple dip.

There are actually no single agreed definitions of recessions or double-dip recessions but the above descriptions are widely used. The US's National Bureau of Economic Research (NBER) writes that it doesn’t define a special category for a double dip recession but examines each case individually. The main consideration is the duration and strength of the upturn after the initial trough.

How common are double-dips?
Harvard academics Carmen Rienhart and Kenneth Rogoff examined the recoveries from 100 banking crises over about two hundred years in a paper issued in January 2014. The pair, who also co-authored the influential 2009 book This Time is Different, treats any renewed downturn that happens before the economy returns to the prior peak as a double-dip. This is a different measure than simply returning to growth. Under that definition, they found double dips for 45% of the 100 financial crises.

At the time of writing, they noted that it was too soon to definitively measure the full effects of the global financial crisis that started in 2007 as many economies had not returned to pre-crisis strength.

Is it just one big recession?
The perception of whether a growth dip is the continuation of an earlier recession or a new, separate recession is important. Professor Jeffery Frankel writes for Project Syndicate that voters in Ireland and Italy, for example, might have thought of political decisions differently depending on if they were told they lived through a double-dip recession or if they were told they were in the same recession for years.

Alphabet soup
In addition to the double-dip, there are several other patterns of economic recovery. As described in the explainer of economic cycles, an “alphabet soup” of models of recovery has been developed. This includes the V-shape (a sharp fall and quick recovery), U-shape (which indicates a slower turnaround) and L-shape (a steep drop then a particularly long and slow recovery).


eZonomics team
.(JavaScript must be enabled to view this email address)