Explainer: What is a K-Shaped Economic Recovery?

Every economy in the world was hit by a pandemic in 2020. After the vaccination, many economies started to function normally. When economies go through these phases, they are called "business cycles." Economic recovery is a business cycle stage followed by a recession. During a recession, economists discuss economic recovery in terms of shapes and letters in order to forecast the type of recovery.

The most common shapes are U, V, and W. Economists use these letters to find out how the recovery period might appear if plotted on a graph that tracks the overall state of the economy.

These graphs are a measure of economic performance over time. Economists use the shape of the graph as a shorthand to describe the recovery process after a crisis like a recession, financial crisis, or external shock like the coronavirus.

But recently, a new symbol has entered the board: the K-shaped recovery.

The K-shaped recovery is unique when compared to other shapes. It foreshadows a dangerous, diverging economic future in which the economy recovers unevenly on one side and the wealthiest prosper while everyone else falls behind.

What is a K-Shaped Recovery?

According to Peter Atwatera, a lecturer at Virginia-based William and Mary University, who popularised the term, a "K-shaped recovery" could be described as "stacked inequity on one side and stacked privilege on the other’.

In simple terms, a K-shaped recovery is a post-recession scenario in which one section of the economy begins to recover while another segment continues to struggle.

The term refers to the shape that when this type of recovery takes when plotted on a line graph. The portion of the population that recovers quickly is represented by the upper part of the K, while the lower part represents those groups that recover more slowly. In some cases, it could be that different industries recover at different speeds.

What caused the K shaped Recovery?

A K-shaped recovery is generally caused by a recession at different paces.

As a "K" letter shape denotes, the economy was divided into two, based on geographic, wealth, and industrial characteristics.

The concept of a K-shaped recovery first emerged in 2020 during the COVID-19 pandemic. The COVID-19 pandemic recovery has been fractured and uneven. Millions of people remain unemployed, while the wealthiest have grown their fortunes.

The latest round of the ICE360 Survey 2021, conducted by People’s Research on India’s Consumer Economy (PRICE), shows that since economic liberalisation, the annual income of the poorest 20% of Indian households, which had been constantly rising since 1995, plunging 53% in the pandemic year 2020–21 from their levels in 2015–16. In the same five-year period, the richest 20% saw their annual household income grow by 39%, reflecting the sharp contrast COVID’s economic impact has had on the bottom of the pyramid and the top.

The survey also shows that the richest 20% of households have, on average, added more income per household and more pooled income as a group in the past five years than in any five-year period earlier since liberalisation.

The survey, between April and October 2021, covered 200,000 households in the first round and 42,000 households in the second round. It was spread over 120 towns and 800 villages across 100 districts.

Furthermore, during the time of COVID, the hardest-hit industries were restaurants, the hotel sector, and the entertainment industries (movies, and others), but at the same time, other industries thrived as companies transitioned to remote work. The demand for electronic gadgets skyrocketed, and employees started using video conferencing tools for meetings. As a result, the web conferencing sector has expanded quickly throughout this time period.

A recent report by Motilal Oswal on the K-shaped recovery of Indian households noted that: salaried workers have fared better than self-employed or casual workers - within the household sector - personal loans have grown much faster than the loans to the unincorporated enterprises during the pandemic; rural areas have performed better than the urban sector during the past two years, and household investments have recovered quicker than private consumption.

Moreover, government and central bank interventions such as monetary and fiscal policies used to battle the recession can also result in a K-shaped recovery.

What are the other types of economic recovery?

The K-shaped recovery is the most recent addition to an alphabetical list of recovery classifications used by economists. Economic recoveries can take a variety of forms, most of which are determined by the rate at which they occur.

V-Shaped: A V-shaped recovery is a rapid and sudden improvement in an economy that follows a rapid and severe fall. This usually happens following a one-time shock to the economy.

U-Shaped: The economic damage from a U-shaped recovery lasts for a longer amount of time before returning to the baseline level of growth. The economy recovers, but the harm at the bottom persists for some time.

L-shaped: The most gloomy scenario is an L-shaped recovery. In this form, the economy rebounds to some extent from a sharp dip, but growth never returns to pre-crisis levels for years, if at all. Following this is a period of economic stagnation.

W-shaped: This is a situation in which the economy experiences a rapid collapse, followed by a small and temporary recovery, and then another decline. It is sometimes referred to as a double-dip recession.

Is K-Shaped Recovery Good for the Economy?

Stating that Omicron is a setback, both medically and in terms of economic activity, former Reserve Bank of India (RBI) governor Raghuram Rajan cautioned the government on the possibility of a K-shaped economic recovery, 

Dr Rajan urged the government to take measures to prevent a "K-shaped recovery" and a possible "lowering" of the economy’s medium-term growth potential, he told PTI in an e-mail interview.

He noted that the economy had some bright spots and a number of very dark stains.

The "bright spots" are the health of large firms, the roaring business the IT and IT-enabled sectors are doing, including the emergence of unicorns in a number of areas, and the strength of some parts of the financial sector, he said.

On the other hand, "dark stains" are the extent of unemployment and low buying power, especially amongst the lower middle-class, the financial stress that small and medium-sized firms are experiencing, "including the very tepid credit growth, and the tragic state of our schooling," he added.

Dr. Rajan also stated that the government must do more to prevent the economy from experiencing a K-shaped recovery as a result of the coronavirus outbreak.

Some economists believe that a K-shaped recovery makes existing problems of economic inequality much worse.