The Fear of “L”

WASHINGTON, DC – For the last few years, economists have been running through the alphabet to describe the shape of the long-awaited recovery – starting with an optimistic V, proceeding to a more downbeat U, and ending up at a despairing W. But now a deeper anxiety is beginning to stalk the profession: the fear of what I call an “L-shaped” recovery.

Viewed in the light of the past five dismal years, 2013 was not bad for the advanced economies. The eurozone technically emerged from recession, the unemployment rate in the United States was lower than in previous years, and Japan began to stir after a long slumber and the negative shock of the earthquake and tsunami in 2011.

But if we look beneath the surface, it becomes evident that we are still hovering on the edge of a precipice. In the third quarter of this year, GDP contracted, on a year-on-year basis, not just in well-known cases like Greece and Portugal, but also in Italy, Spain, the Netherlands, and the Czech Republic. And GDP in some countries, like France and Sweden, grew at rates lower than population growth, implying that per capita income declined.

Moreover, labor-market conditions deteriorated toward the end of the year. The number of unemployed in Germany grew for four consecutive months up to November. Among the industrialized countries, the US is the bright spot. But, even there, while the unemployment rate has dropped during the year, and now stands at 7%, long-term joblessness is at an unusually high 36% of total unemployment, threatening to erode the skills base and make recovery that much more difficult.