The state of the world economy –The K-shaped Recovery Continues

K-shaped recovery: As the number of coronavirus vaccinations given increases worldwide, the global economy is starting to recover. However, the economic recovery is not following the usual trajectories we have seen in previous crises.

The covid-19 pandemic has produced a new economic pattern – a K-shaped recovery.

The previous cyclical alphabet

Following past economic slumps, four main types of economic recoveries emerged.

These letters indicate the performance of an economy – measured by the value of all goods and services, i.e., by real gross domestic product (GDP) – over time.

The implicit assumption is that all sectors of an economy recover at more or less the same pace. However, the current covid-19 pandemic has led to a new kind of recovery – with different sectors recovering at different rates.

Covid-19 pandemic – economic recovery at different speeds

For the first time in history, this economic crisis was caused by a pandemic that restricted or even banned social contacts between people for long periods of time. This impacted all sectors of the economy to different degrees – and resulted in different consequences.

In the 21^st century, companies that manufacture physical products – televisions, shoes, computers, etc. – can sell their products even when brick and mortar retail stores are closed. Manufacturers can switch to online commerce.

Some companies were even able to dramatically increase their sales and profits during the Corona pandemic. A prominent example is Amazon – global quarterly profits have reached record levels since the outbreak of the pandemic.

On the other hand, there are numerous service sectors in which services can only be consumed if there is physical contact between the provider and its customers. Examples include an overnight stay at a hotel, a haircut, or a flight – online offers are of no help there. The affected branches are suffering to a considerable extent from the Corona pandemic.

To make matters worse, the opportunities to make up corona-related sales shortfalls are different. The purchase of a car or computer that did not take place in the spring of 2020 due to corona can be made up in the fall of 2020. However, the Easter vacation that was canceled in 2020 cannot.

What is a K-shaped economic recovery?

If the sectors of an economy recover from the Corona shock at different rates, it is no longer sufficient to look at the development of a country’s GDP. Instead, it is necessary to observe how the sectors’ output develops over time.

If the output of the sectors measured in monetary units is used, the following stylized picture emerges:

• Sectors that manufacture physical products and sell them via online retail show a V-shaped development of their production volume.
• Companies offering personal services are coming through the crisis worse. There is no rapid recovery for these companies. Their production volume is L-shaped. In fact, even further declines in production are possible. One reason for this is company closures, for example.

If these two stylized patterns are transferred to a time-output diagram, the result for the economy as a whole is a pattern resembling a K.

Why does it matter?

For the entire economy, a K-shaped economic cycle still results in an overall increase in output and GDP. Although the economy recovers more slowly from the Corona shock than in a situation when all sectors have a V-shaped economic cycle, it is still growing.

However, income disparities within society are increasing. People who work in manufacturing companies quickly regained their original income. On the other hand, those who work in companies with a weak recovery suffer a drop in income or even the loss of job. As a result, people’s living conditions are drifting apart.

This also results in regional income differences. One example: regions that live mainly from tourism are suffering longer from the economic crisis than regions that are home to numerous digital companies.

Outlook

Once the economic crisis has passed, a central economic and political question will arise: How do we deal with the income and wealth inequalities exacerbated by the Corona pandemic?

Usually, such disparities are compensated for by government transfer payments. However, this will become increasingly difficult in the future: During the economic crisis, government debt has risen massively because rising government spending – above all for economic stimulus packages – has met with falling government revenues. This has limited the state’s scope for action.

Unfortunately, the social dimension of the covid-19 pandemic will continue to occupy policymakers even after the pandemic has been contained.