K Shaped Economic Recovery

Context:

According to the latest round of ICE360 Survey 2021, K-shaped recovery emerges from the economy hit by the coronavirus pandemic.

Background

• The duration of the coronavirus recession will only be obvious in hindsight. Past recessions and recoveries have followed four common shapes: V, U, W and L, where the letters describe the trajectory of Gross Domestic Product (GDP), employment and other key metrics tracking economic conditions.
• Thankfully, recessions do not last forever, and neither will a coronavirus recession. At some point, the economy will reopen and start growing again, although what the recovery might look like is unclear.
• Governments are trying different methods and policies for the recovery. But predicting the existence of a potent virus is not possible. A given mutation can lead to further crisis or can even slow down. But economic models are needed to give predictability in this uncertain environment.

K Shaped Economic Recovery

• A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes. This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
• A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
• This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

U Shape Recovery:

• In a U-shaped recovery, it takes many months, if not years, for the economy to recover. The long, flat stretch of sideways growth comprises the bottom of the U shape. The Great Recession is a good example of a U-shared recession. In other words, a U-shaped recovery — resembling a bathtub — is a scenario in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels.
• If COVID-19 causes a longer, U-shaped recovery, that could mean the economy wouldn’t begin recovering until the end of 2020 or even early 2021. There are a few reasons this could happen. First and foremost, if it takes longer to get the surge in coronavirus cases under control, it could delay when states and regions can begin reopening their economies.
• In addition, if many businesses end up going bankrupt during the period of economic shutdown or are otherwise unable to reopen, there will be fewer jobs when the stay-at-home orders end, creating more economic dislocation. Finally, consumers might not be ready to start spending when things reopen, especially if they are still scared to go out or they do not get enough financial assistance.

Z Shape Recovery :

• The Z-shaped recovery is the most-optimistic scenario in which the economy quickly rises like a phoenix after a crash. It more than makes up for lost ground (think revenge-buying after the lockdowns are lifted) before settling back to the normal trend-line, thus forming a Z-shaped chart.

W Shape Recovery :

• In a W-shaped recession, the economy begins to recover rapidly, but then falls into a second period of decline. This is also known as a double-dip recession—the two economic declines create the shape of a W. This shape signifies of the threat of the second wave of virus.
• Here, the world wins only a temporary respite, with the virus returning in winter. However, the world will be better prepared, testing facilities will be more widespread and the western world more willing to live with restrictions on individual freedoms, slowing the spread of the disease. Growth will plummet after the initial recovery following easing of restrictions. But greater success in dealing with the return of the virus will see growth recover much faster.

V Shape Recovery :

• V-shaped recovery in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.
• Here, the world recovers quickly. Like China, where harsh lockdown measures not only contained the virus from spreading to other areas, but lifting of restrictions has also seen a rapid recovery in economic activity. The virus is defeated for good and does not return. Even if it does, it is no more feared than the ordinary flu. In any case, majority of the population already has immunity against it.
• Once we are in recovery mode, the recovery will be very fast as global supply chains could be reconnected instantly. However, the timing of the recovery depends on how we manage the virus over the next few months. If we are able to contain COVID-19 quickly, we will have a V-shaped recession. If we are not able to contain COVID-19 in the near future, we will have a U-shaped recession.

L Shape Recovery :

• Here, lockdown measures continue, although with varying intensity, till much later in the year.  Economic growth plummets and stays low for a long time. It is only by Q2, 2021that the world takes slow hesitant steps towards recovery, with recovery to pre-COVID-19 levels likely only by 2023. It is a worst case scenario.
• If everything goes wrong in dealing with the COVID-19 crisis, there is the potential for an L-shaped recession. This could happen if we cannot control coronavirus outbreaks, which would lead to years-long shutdowns and sluggish growth, if not outright stagnation.
• While an L-shaped recession is possible, most experts do not think it will happen. Only 8% of companies predict that an extended recession, that lasts until 2022 or longer, will happen.

SWOOSH Recovery :

• Neither L nor U nor V, will do. Instead, we look for a tick mark-style profile.
• That implies a sharp downturn, then gradual recovery as lockdowns are eased more gently than they were imposed.
• With consumer spending possibly impaired by a higher propensity to save and serious potential curbs on investment, it is likeliest scenario for the world economy’s rebound post lockdown to be quite soft

Other Shapes

• There is the J-shaped recovery, a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.
• Inverted square root shaped recovery. Financier George Soros, who coined this term years ago, explained that while there could a rebound from the bottom, the growth slows and settles a step down.

 ICE360 Survey 2021

Key Points

• Effect on Annual Income:
  • The annual income of the poorest 20% of Indian households, constantly rising since 1995, plunged 53% in the pandemic year 2020-21 from their levels in 2015-16.
  • In the same five-year period, the richest 20% saw their annual household income grow 39% reflecting the sharp contrast Covid’s economic impact has had on the bottom of the pyramid and the top.
• Urban Poor Most Hit:
  • The survey shows that the pandemic hit the urban poor most and eroded their household income.
    • This resulted in job losses and loss of income for the casual labour, petty traders and household workers.
    • The pandemic brought economic activity to a standstill for at least two quarters in 2020-21 and resulted in a 7.3% contraction in GDP in 2020-21.
• Rise in the Share of Poor in Cities:
  • While 90% of the poorest 20% in 2016, lived in rural India, that number had dropped to 70% in 2021.
  • On the other hand, the share of the poorest 20% in urban areas has gone up from around 10% to 30% now.
• View of Economist on K Shaped Recovery:
  • The government needs to do more to prevent a K-shaped recovery of the economy hit by the coronavirus pandemic.
  • The Indian economy has “some bright spots and a number of very dark stains” and the government should target its spending “carefully” so that there are no huge deficits.
    • The bright spots are the health of large firms, the roaring business the IT and IT-enabled sectors are doing, including the emergence of unicorns in a number of areas, and the strength of some parts of the financial sector.
    • The “dark stains” are the extent of unemployment and low buying power, especially amongst the lower middle-class, the financial stress small and medium-sized firms are experiencing, “including the very tepid credit growth, and the tragic state of the schooling”.

Way Forward

• The government must spend where necessary at this time to alleviate the pain in the most troubled areas of the economy.
• Announcing a credible target for the country’s consolidated debt over the next five years coupled with the setting up of an independent fiscal council to put forward on the quality of the budget would be very useful steps.
• Budgetary resources can be expanded through asset sales, including parts of government enterprises and surplus government land.

Source: Indian Express