Government stimulus policies will result in a “hook”-shaped global economic recovery in 2009-2010, implying a gradual and painful economic recovery, suggests Moody’s Investors Service in a new special comment, entitled On the Hook — Update on Moody’s Global Macroeconomic Risk Scenarios 2009-2010.

The Moody’s report explains that the “hook”-shaped scenario has the steep downturn signalled by the “U”-shaped scenario, but neither the steep but delayed rebound of the “U” scenario, nor the flat stagnation of the “L”-shaped scenario. Instead, it has an upward tilt that lies somewhere in between, illustrating the painful recovery that the headwinds of a severe and synchronized balance sheet restructuring will cause. The “hook-shaped” scenario is a variant of — rather than a departure from — the U-shaped recovery, which was the previous central forecast.

Given the rapidly evolving situation, Moody’s has been publishing six-monthly updates of its two-year-horizon global macroeconomic risk scenarios with the aim of providing an overall framework for Moody’s rating decisions across all sectors. Over the past 18 months, the rating agency’s worst-case scenario has consistently emerged as being closer to reality than its central scenarios. In fact, the actual collapse in output has exceeded the rating agency’s worst expectations.

“Nevertheless, it is the overall profile of the economic and financial deterioration that defines our scenarios rather than specific data points,” says Pierre Cailleteau, Moody’s chief international economist. “We believe the ‘hook’-shaped scenario better describes the process of painful ‘healing’ that we believe is at play.”

Despite recent tentative signs of stabilization in China and in the U.S. in particular, Moody’s believes that the process of balance sheets cleaning up on the global stage — among households in the U.S., Britain and a few other countries, as well as banks everywhere — is far from complete. Moreover, governments are taking risks with public finances with their unconventional stimulus policies, and the necessary “deleveraging” of public finances will slow the recovery.

“As a result, Moody’s is not ruling out that the hook-shaped scenario could potentially evolve into an L-shaped scenario,” explains Cailleteau, “but it is too early to adopt this as Moody’s central scenario, because the full impact of government stimulus policies has yet to be seen.”

Cailleteau adds: “Overall, we are currently experiencing a defining moment for globalization but not yet a complete unravelling of globalization.”