What is K-Shaped Economic Recovery Curve | Covid Crisis
What is K-Shaped Recovery Curve?
AUTHOR : Riya Kashyap
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. It 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.”
It is the business cycle stage following a recession that is characterized by a sustained period of improving business activity. Normally, during an economic recovery, GDP grows, incomes rise, and unemployment falls and as the economy rebounds.
Recently, the latest readings of the Nomura India Normalization Index (NINI) suggested the impact of Covid 19 on Indian Economy and the K-Shaped Recovery through which the Indian Economy is recovering.
Effect of Covid-19 on households :-
- Households at the top of the pyramid are likely to have seen their incomes largely protected, and savings rates forced up during the lockdown, increasing ‘fuel in the tank’ to drive future consumption.
- Households at the bottom are likely to have witnessed permanent hits to jobs and incomes.
Effect of the Current Monetary Policy :-
- A long lasting period of ultra-accommodative monetary policy has led to a fall in real lending rates and spreads for corporates and households that should eventually come as lagged relief to the interest-sensitive sectors.
- An economic spread is a measure of a company’s ability to make money on its capital investments.
Economic Recovery after Covid-19 :–
- As the fiscal deficit in FY 2020-21 has widened to roughly 7% of GDP, which is double the pre-pandemic target of 3.5 % of GDP. The government may, therefore, feel encouraged to rely on higher fuel taxes, disinvestment.
- India is going through a K-shaped recovery, wherein corporates and households with stronger balance sheets have recovered more robustly, while smaller firms and poorer households probably remain trapped in a vicious cycle of poverty and indebtedness instigated by the pandemic.
Implications of the K-Shaped Recovery :-
- Households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts, this will be a recurring drag on demand, if the labour market does not heal faster.
- To the extent that Covid has triggered an effective income transfer from the poor to the rich, this will be demand-impeding because the poor have a higher marginal propensity to consume (i.e., they tend to spend-instead of saving) a much higher proportion of their income.
- If Covid-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.
With the top 10 per cent of India’s households responsible for 25-30 per cent of total consumption, one could argue consumption would get a boost as this pent-up demand expresses itself. But it’s important not to conflate stocks with flows, and levels with changes. Upper-income households have benefitted from higher savings for two quarters. What we are currently witnessing is a sugar rush from those savings being spent. This is, however, a one-time effect.
More recently, JP Morgan introduced the K-shaped recovery curve, which paints a more realistic, yet unpleasant, picture. As per their analysis, the covid-19 recovery path bifurcates in two directions: large firms and public-sector institutions with direct access to government and central bank stimulus packages will make some areas of the economy recover fast but leave others out. Those that get left out are the small and medium-sized enterprises (SMEs), blue-collar workers, and the dwindling middle class.
Misallocation of stimulus funds or emergency subsidies makes some areas of the economy recover fast but leaves out others. In economics, this is known as The Cantillon Effect, which refers to the change in relative prices resulting from a change in the money supply. When liquidity is injected into the market, there are distributional consequences that operate through the price system. Prices act as viable signals, as relative price changes occur because the change in money supply has a specific injection point, and therefore a specific flow-path through the economy. The higher the level of unemployment in a recession, the longer the recovery curve and this crisis is going to have an exceptionally long recovery curve.
Rising inequalities were particularly painful to a low-income country like India, where the upper segments of the population have seen their incomes protected and their wealth rise while the lower sections have lost jobs, incomes, savings and purchasing power. About 122 million people, mostly daily wage earners and those employed by small businesses lost their jobs to one of the world’s strictest lockdowns around this time last year, and new localized lockdowns by Indian states now are once again pushing the unemployment rate higher.
The importance of using technology as a lever of adaptation and survival is going to become increasingly important as covid-19 instigates changes in consumer preferences and increases their use of digital platforms. If before technology was seen quasi-exclusively as the panacea of all troubles, it may be time just now to collectively design it toward solutions of which we are in dire need. Furthermore, a K-shaped recovery can reveal the existence of “creative destruction,” a term and concept coined and developed by Austrian economist Josef Schumpeter in 1942. According to Schumpeter, creative destruction occurs when novel technologies and industries take the place of old ones during a recession.
A K-shaped recovery scenario can also provide financial and monetary clues into public policy response, benefiting some areas of the economy more than the others. Or quite simply, it can show the differential impact of the initial recession on various economic sectors, particularly when the recession happens with or is spurred by negative real economic shocks that affect certain areas of the economy at different magnitudes. However, keep in mind that these three are not always co-exclusive but may interact with other factors in any K-shaped recovery.
Given the K-shaped recovery and the new pandemic poor the budgets for spending heads such as subsidies, employment generation, rural development and other social sector programmes are likely to remain large. The vaccination costs add to the bill. The government will also have to sharpen its focus on capital spending to contain damage to potential growth.
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