K-shaped economic recovery

Recently, Chief India Economist at JP Morgan, states the prospects of a K-shaped recovery from COVID are increasing both in India and across the world.

What is a K-shaped recovery?

• A K-shaped recovery happens when different sections of an economy recover at starkly different rates.
• 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.
• Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes.

Macro implications of a K-shaped recovery

• 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.
• Upper-income households have benefitted from higher savings for two quarters.

Why is it important for India?

• The Indian economy was slowing down even before Covid hit, and the trouble has now been amplified manifold because of the lockdowns.
• A Z- or at least V-shaped recovery would be the most preferable.
• If not, we should at least have a U-shaped recovery or a Swoosh to get back on our feet in a couple of years.
• The different types of shape of the economic recovery are U, V, W, Z, L, J, Swoosh and Inverted square.

Z-shaped recovery

• It 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.

V-shaped recovery

• In V-Shaped recovery, the economy quickly recoups lost ground and gets back to the normal growth trend-line.

U-shaped recovery

• It resembles a bathtub, in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels.

W-shaped recovery

• It is a dangerous creature — growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart.
• The double-dip depicted by a W-shaped recovery is what some economists are predicting if the second wave of Covid comes along and the initial rebound flatters to deceive.

L-shaped recovery

• It is the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.

Swoosh shaped recovery

• It is similar to the Nike logo — in between the V-shape and the U-shape. Here, after falling, growth starts recovering quickly but then, slowed down by obstacles, moves gradually back to the trend-line.

J-shaped recovery

• In this, the growth rises sharply from the lows much higher than the trend-line and stays there.

Inverted square root shaped recovery

• In this scenario, while there could be a rebound from the bottom, the growth slows and settles a step-down.