k-shaped-recovery

  • The term ‘K-shaped recovery’ is used to describe what has been happening in varying degrees since the financial crisis of 2008: The growing gap between winners and losers among countries, economic sectors, companies, and, of course, people.
  • For example: Industries like technology, retail, and software services have recovered from the industry and begun re-hiring, while the travel, entertainment, hospitality, and food services industries have continued to decline past March levels.

Weekend reading: Congratulations! It's a bouncing baby K (-shaped recovery)  | Monevator

Other Major Types of Economic Recoveries

Z-shaped Recovery 

  • If the economic disruption was just for a small period wherein more than people’s incomes, it was their ability to spend that was restricted, it is possible to imagine a “Z”-shaped recovery.

  • In this, the GDP — and here we are talking about absolute GDP, not GDP’s growth rate — actually overshoots the trend path because of the pent-up demand. 
  • Imagine, deferred parties, salon visits, movies, purchase of new cars, houses and appliances etc. — all of them get bunched up together.

V-shaped Recovery 

  • But what if the economic disruption lasts longer resulting in several activities being forgone instead of being deferred? 
  • For instance, even the monthly haircut — when you go to the salon after 3 months, you have already lost 2 haircuts-worth of economic activity forever!

  • In such a scenario, and assuming incomes and jobs are not permanently lost, the economic growth recovers sharply and returns to the path it was following before the disruption. This is called a “V”-shaped recovery.

U-shaped Recovery 

  • But what will happen if this recovery is slower and takes more time because the economic disruption resulted in several jobs being lost and people losing incomes, drawing down on their savings etc.?

  • Then the economy will follow a “U”-shaped path. In such a scenario, after the initial fall, the recovery is gradual before regaining its momentum. 

W-shaped Recovery 

  • Since we are talking about a Covid-induced disruption, it makes sense to also look at a “W”-shaped recovery as well. 
  • This shape allows for the possibility of a V-shaped recovery, which is pegged back by a second wave of infections until of course, the economy recovers for the second time.

L-shaped Recovery 

  • The last scenario is the one policy-makers most dread. It is called the “L”-shape recovery. 
  • Here, simply put, the economy fails to regain the level of GDP even after years go by. 
  • As the shape shows, there is a permanent loss to the economy’s ability to produce.