The shapes of economic recovery are often discussed in the current affairs of the country. You may have read that India’s recovery after the coronavirus pandemic is likely to be a K-shaped one instead of a V. What is Economic recovery? What do K, V, U, L, and W-shapes recoveries mean? Read here to find out.
Almost three years after the World Health Organization declared COVID-19 a pandemic, the world is still bouncing back from the disruptions caused by the virus.
The most consequential impact has been the pandemic’s toll on healthcare systems and a persistent and reverberating economic toll.
Government actions to counter infections and contain the spread of the virus led to a global supply crunch, especially in manufacturing. The lockdowns and other containment measures caused widespread business disruption.
It is now clear that the pandemic has brought the world to the second great economic and financial crisis of the 21st century and is likely to have long-term structural repercussions.
India’s economic recovery
The pandemic caused a global economic and financial crisis, hence economic recovery was central to every government’s forward agenda.
The Indian economy has generally shown impressive growth indicative of a good economic recovery over the years. But some economists have expressed doubts over the extent and durability of the economic recovery mainly due to weak demand and investment.
Recently, the Chief economic advisor mentioned that it is wrong to describe India’s urban and rural recovery as a K-shaped recovery.
- Post-pandemic, India’s urban and rural areas have seen different growth rates with urban recovery proceeding at a faster pace than rural recovery.
- K-shape recovery denotes a situation of inequality, following a recession, with different parts of the economy recovering at different rates, times, or magnitudes.
- Under it, some sectors experience growth while others continue to decline. levels.
- The CEA said that urban recovery is proceeding at a faster pace than rural recovery.
India’s economy grew at a weaker-than-expected 4.4 percent in Q3 amid wide revisions to earlier GDP figures, as manufacturing output contracted for the second consecutive quarter and consumer demand slowed.
The CEA said there was still pent-up demand in the system, as, in the past three years, India had been growing below potential.
Shapes of economic recovery
Economists employ recovery shapes to describe various recessions and the recovery that follows.
The letters V, U, W, L, and K used to represent the shapes are called by the way each recovery appears on a graph that measures the state of the economy as a whole.
People may easily debate and predict the intricacies of an economic slump and how long it could take to recover by using recovery shapes.
In a V-shaped recovery, the economy experiences a sharp decline but then bounces back almost immediately to its pre-recession level.
- The period in which the economy remains at a low point (the bottom of the V) is extremely brief.
- This may happen if the downturn in the economy that triggered it doesn’t continue very long.
- There can be a seasonal slowdown where firms are holding positions for momentarily unemployed customers.
- Perhaps if quick and innovative fiscal and monetary measures successfully lessen the effects of the recession.
A V-shaped recovery is a best-case scenario, where the economy bounces back immediately bolstered by appropriate fiscal and monetary policies.
In a U-shaped recovery, commonly known as the “Nike Swoosh” recovery, the economy undergoes prolonged stagnation following a downward trend.
It then gradually climbs to its earlier peak. This prolongs the recession, which results in job losses and the depletion of reserves.
- It is less ideal than the V-shaped recovery but much better than the worst-case scenario.
- It doesn’t necessarily mean that the recession is more severe in terms of the loss in GDP, but it does mean that it lasts longer.
A W-shaped recovery, also known as a double-dip recession, occurs when the economy briefly recovers and people believe they will have a V-shaped rebound before the economy declines once more.
- As it is effectively two recessions in one, the first’s effects are prolonged and consumer confidence may be destroyed.
- The economy might occasionally enter a second recession due to the nature of global events.
- It can also do so as a result of fiscal and monetary measures taken to ease the previous one.
The L-shaped recovery represents the worst-case situation. Even after several years, the economy in this case is unable to reach its peak GDP. It’s sometimes called ‘depression’.
- Of all forms, this has the longest recessionary time. Sometimes the decline and the gradual recovery persist eternally.
- It can take years for the economy to get back to where it was pre-downturn, and in some cases, this slow revival drags on indefinitely.
K-shaped economic recovery
The K-shaped recovery differs from the others in a small way. It’s a relatively new phrase coined to explain what economists believe the COVID-19 epidemic would bring about.
- In this scenario, one sector of the economy has a recovery that is more V-shaped or U-shaped, while another either continue to decline or recovers considerably more slowly, as in the case of the L-shaped recovery.
- The two diagonal lines of the letter K represent this separation between two distinct economic groupings.
- Industries and people are both impacted groups.
- High-tech and e-commerce are two examples of sectors that were able to continue operating or even prosper throughout the pandemic, whereas other industries had significant slowdowns or were essentially unable to function (i.e., travel and hospitality, arts and entertainment).
- Certain sections of the economy will recover more quickly due to large-cap corporations and public-sector organizations that have access to government aid and central bank stimulus programs.
- Blue-collar employees and small and medium-sized businesses are excluded from the recovery process.
- The two diagonal lines of the letter K signify the split between these two groupings.
- Such a rebound occurs when several sectors of the economy improve at wildly dissimilar speeds.
The most typical recoveries are V-shaped and U-shaped, while the other forms are not unusual.
The shortest time spent in the recession’s trough makes a V-shaped rebound the best-case scenario, while an L-shaped recovery is a worst-case scenario since it has the longest recovery.
These letters only provide a portion of the tale, though. The length and character of the economic recovery are described, but the depth of the recession that preceded it is not.
It is impossible to determine the type of shape of economic recovery when in the middle of a recession. Economists can provide educated predictions once the key economic indicators such as GDP, employment, and inflation (price increases, due to growing demand) begin to respond.
The shape of economic recovery is not an exact science, but the predictions help governments, investors, and consumers alike in planning monetary policies and investments.
-Article written by Swathi Satish