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Shapes Of Economic Recovery

  • 08 Sep 2020

The shapes of economic recovery is determined by both the speed and direction of GDP prints. This depends on multiple factors including fiscal and monetary measures, consumer incomes and sentiment.

  • 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: It isthe next-best scenario in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.
  • U-shaped recovery: It is a scenario 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 serious situation - growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart.
  • L-shaped recovery: Itis the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.
  • J-shaped recovery: It is a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.
  • 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.
  • Inverted square root shaped recovery: In this, there could a rebound from the bottom, the growth slows and settles a step down.

K Shaped Economic Recovery

  • As the economy struggles to shake off the pandemic effects, worries are growing that the recovery could look like a ‘K’.
  • Essentially, the concept rests on the idea that while the fortunes of some in the economy have nearly or fully recovered (broadly defined), the fortunes of many are still declining, or at least failing to recover nearly as quickly.
  • K is reflective of the performance of the stock market — a sharp decline followed by sharply divergent pathways.
  • The rolling lockdowns due to Covid 19 have sent the economy into a tailspin. Growth in India, and indeed much of the world, is set to fall off a cliff in FY21.
  • That would be one where growth continues but is uneven, split between sectors and income groups.
  • K-shaped recovery means the growing gap between ‘winners and losers’. An example in India is the stock market being healthy while millions have lost their jobs.

Why is it important?

  • The Indian economy was slowing down even before Covid hit, and the trouble has now been amplified manifold because of the lockdowns.
  • Experts predict a fall of up to 5 per cent in the GDP in FY-21. This is clearly a crisis situation, and our getting out of the hole will depend a great deal on the shape of the economic recovery that will hopefully follow.

Which Shape of Recovery is Favourable?

  • 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.
  • A W-shape will bring in much pain before the eventual gain, while an L-shape or the Inverted-square root will make a wreck of the growth train.