K-SHAPED RECOVERY

21st May, 2021 Prelims

K-SHAPED RECOVERY

What is a K-shaped recovery?

A K-shaped recovery is a post-recession scenario in which one segment of the economy begins to climb back upward while another segment continues to suffer.
If illustrated, the economic growth would roughly resemble the two diverging diagonal lines of the letter "K" - hence the name.

Have we ever had a K-shaped recession?

While V-shaped, U-shaped, and W-shaped recoveries have been around for decades, the concept of a K-shaped recovery first emerged in 2020 during the COVID-19 pandemic.

Divergence in K-shaped recovery

The split course of the K-shaped recovery suggests systemic inequalities in the economy and society.
It stems from pre-existing social and economic divides that are then exacerbated by a recession or other economic catastrophe. The economy is essentially split in two.
The divisions can occur along social class, racial, geographic, generational, or industry lines - or a combination thereof.

Impact

Households at the top of the pyramid are likely to have seen their in- comes 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,
What's particularly concerning about a K-shaped recovery is the way it splinters the economy, continually widening the gap between those who are doing well and those who are not.
In the end, a K-shaped recovery makes any existing problems of economic inequality much worse.

Macro implications of K-shaped recovery in India

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 amid Pandemic.
Upper-income households have benefitted from higher savings.
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.
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.

Financial Takeaway

A K-shaped recovery occurs after a recession when certain parts of the economy resumes growth while others lag behind indefinitely, and it's a type of recovery that rose to prominence during the COVID-19 pandemic.
The K-shaped recovery didn't cause these inequalities, but it does expose them.
And these trends, and the resulting disparity, are likely to become even more concentrated if it continues.

K-shaped recovery vs. other recovery types

V-shaped recovery

A sharp decline followed by a rapid recovery, with very little time spent at the trough, or low point, of the recession.

U-shaped recovery

A steep decline followed by a period of time in which the economy sits at the low point of the recession before finally recovering.

W-shaped recovery

Also known as a double-dip recession, this is a scenario when the economy experiences a steep decline, followed by a small and temporary recovery and then a second decline.