Economies go through multiple phases in business cycles. One such phase is a recession which is marked by a slowdown in economic activity. Economic recovery may not be uniform for all sectors and industries. This is why economists use different shapes marked by alphabetical letters to mark the speed and magnitude of economic recovery. One such example is K-shaped recovery where different parts of the economy recover at different rates.
In this blog, we will explore the K-shaped recovery model and its link with the 2020 coronavirus-induced global economic distress. Read on!
A K-shaped recovery (also K-shaped economy or a K-shaped economic recovery) refers to a post-recession recovery period that isn’t uniform but takes two divergent paths.
Some sectors, and some sections of society, witness an uptrend in income. Other sectors, and other sections of society, continue to experience the effects of the recession or are – in effect – still amidst a recession.
That’s the term K-shaped recovery is used interchangeably with K-shaped recession (although the terms might at first seem to be contradictory) because in a sense, the recession continues.
When you see a K-shaped recovery graph on the stock market, you will notice that the stock prices of companies operating sectors that managed to adapt (or found an opportunity – like web conferencing and lab testing) start to climb. On the other hand, the K-shaped recession continues, and stock prices of companies within sectors that suffered continued to struggle. You might call this K-shaped inflation of stock prices because some stock prices embark on an uptrend, while others continue their downtrend.
A K-shaped economic recovery of the stock market differs from L-shaped, V-shaped, U-shaped and W-shaped recovery shapes, which indicate a more cohesive recovery. We will address these more common shapes a little later in this article.
A K-shaped economy is caused by a recession that impacts different social groups and different sectors to varying levels. This is often compounded by fiscal schemes by the government that, although well-intended, end up benefiting some sectors and some segments of the population more than others.
An excellent example of K-shaped recovery can be seen when you look at household income of various sections of society in India.
In data released by a not-for-profit think-tank, PRICE, we see that the income of the poorest 20% of India’s households declined by 53%, a stark contrast to the richest 20% of the nation’s households, which witnessed a 39% increase in their income.
This K-shaped, extremely disparate rate of recovery is not unique to India. In the US, too, polarized rates of recovery are being witnessed, linked to ethnicity/ race. A US-based think-tank, Pew Research, found that while less than 38% of white households experienced job loss amidst the pandemic, nearly 44% of black households experienced job loss, and over 61% of Hispanic households suffered a job loss.
A k-shaped recovery perpetuates and accentuates inequality in a nation. This has the potential to impact consumption because only the parts of society that benefit from recovery can be relied upon to continue consuming.
In the long run, sections of society that are experiencing continued negative impacts of the recession will not have the capacity to continue spending.
Let’s take a look at the V-shaped, W-shaped, and U-shaped recoveries to understand how the K-shaped economic recovery is unique (and also far from desirable as compared to its peers.
Here are a few differences between K-shaped recovery and a V-shaped recovery of the economy:
|K-shaped recovery||V-shaped recovery|
|K-shaped recovery is considered an uneven outcome after recession||V-shaped recovery is considered the best outcome after a recession|
|It is an irregular and lopsided form of recovery.||2. It is a rapid and strong form of recovery.|
|Return of the economy to pre-recession levels takes a long time.||3. Return of the economy to pre-recession levels occurs relatively quickly.|
|Different sectors of the economy recover at different rates.||4. Different sectors of the economy recover at a steady rate.|
|Denotes widening of economic disparities.||5. Denotes revival of the economy.|
The 2020 recession due to the coronavirus pandemic is witnessing a K-shaped recovery. The recovery can be credited to adaptability and web conferencing. Many companies switched to remote working overnight to keep their businesses going but for some sectors like restaurants and aviation, films and other forms of face-to-face entertainment suffered losses.
Smaller businesses, people new to the workforce and those in non-critical roles have also been among those who were negatively impacted by the pandemic-induced recession.
After a recession, where the economy has undergone a significant overhaul, it is essential to determine what to expect with regard to its revival. To denote the various ways in which an economy bounces back, economists use the shape of alphabetical letters to demarcate the speed and trajectory of economic recovery. One such model is the K-shaped recovery which signifies an uneven road to recovery.
For the nation, a K-shaped recovery has socio-economic implications like rising poverty. As investors, it might mean that our “invest on dips” philosophy is challenged because some sectors might continue to dip, and returns might be a long time in the making.
Ans: A K-shaped recovery is characterized by some sections of society and some sectors having the experience that you have described/ are experiencing and other sections of society/ other sectors experiencing a continued downtrend.
A K-shaped recovery also increases the divide between the rich and the poor.
Ans: Pretty much every country in the world is facing a K-shaped recovery. GDP might improve due to fiscal packages and inflation, and rising spending from the sections of society that are less impacted in the divergent K-shaped recovery, where some sectors recover but others experience a continued recession.
Ans: The K-shaped recovery indicates that some sections of the economy and society enjoy a recovery after a sharp decline while other sections continue to decline. There’s some amount of recovery.
L-shaped recovery indicates a prolonged economic lull or a failure to rebound.
It’s hard to decide which is worse because the K-shaped recovery means elevated levels of struggle for low-income groups, but at least the whole economy is not impacted. The government can step in and enable recovery for suffering sectors and sections of society.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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