WHAT’S IN A SHAPE??
The Shapes of the Economic Recovery Unveiled…
Do any of these headlines sound familiar?
“The economists are unanimous that in the current financial year 2020-21, India’s economy will contract.”
“According to the World Bank’s South Asia Economic Focus report, India’s growth is likely to remain at 1.5-2.8% in 2020-21 which is the slowest since 1991 economic reforms.”
“According to an analysis by Pronab Sen, former Chief Statistician of India, India’s economy will contract not just in the financial year 2020-21 but also in 2021-22.”
What does all this mean and should you be worried?
All the above news excerpts clearly show that the present economic state is in no good condition owing to the pandemic, lockdown and the economic slowdown.
In today’s article, we will focus on a very interesting topic. If we were to draw a graph of how our economy is going to recover, what would it look like?
This graph has an economic measure on Y-Axis and Time on the X-Axis.
Here are a few samples for you:
Before we go on to predict how will India’s shape look like, let us take a quick look at what each of these shapes depict.
V-Shaped Recovery: Quick Bounce
In such a recovery, it is expected that activity returns to pre-recession levels in the same or less time as the duration of the downturn. The re-opening of economies will occur much more gradually, precluding a sharp ascent during the recovery phase that characterises a V-shaped rebound.
Essentially it assumes that when the lockdown rules are lifted, the customers will return immediately and employees are ready and able to provide products and services. These companies would return to the normal path they were on in January 2020. Netflix seems to be on a v-curve recovery.
U-Shaped Recovery: Slow Recovery
The slower U-shaped recovery is more realistic for most companies. For most companies, it will take some time for customers to return and for business to be back to normal. Customers may have shifted priorities so will come back more slowly.
The clearest example of a “U” was the Global Financial Crisis (GFC). Over the course of 2008 and 2009, the contraction in real GDP became gradually more pronounced, and the subsequent rebound to pre-GFC levels in many countries took years.
L-Shaped Recovery: No Return to Normal
The most pessimistic pattern, in this case, the level of activity drops almost vertically and then essentially flat lines over the course of several years. The business has dropped off. It’s unclear if it will ever recover. There is persistent unemployment and stagnant economic growth.
The most important feature that defines an L-shaped recovery is a failure of the economy to progress back toward full employment after a recession. Three major examples of L-shaped recoveries stand out in the last century of economic cycles: the recoveries of the Great Depression of the 1930’s, the Lost Decade in Japan, and the Great Recession following the 2008 financial crisis.
W-shaped Recovery
It is also called “double-dip”. A W-shaped recovery is when an economy passes through a recession into recovery and then immediately turns down into another recession. The middle section of the W can represent a significant bear market rally or a recovery that was stifled by an additional economic crisis. There is a period of extreme volatility.
A W-shaped recession is painful because many investors who jump back into the markets after they believe the economy has found a bottom end up getting burned twice—once on the way down and then once again after the false recovery. This occurred in US in the early 1980s followed by second recession in 1981 to 1982.
Swoosh/tick/italicised V-shaped Recovery
Characteristically, there is a steeper gradient on the downside, then a partial bounce, followed by a more gradual recovery. The second-half rebound is unlikely to recoup all of the losses generated in the first half.
Other curves like Z and J also exist. The Z-shaped recovery 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. The J-shaped recovery is a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.
The Indian Story
To get a better picture of how the economy recovers, let’s see what hinders its recovery in the first place. The shape 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.
On the consumer front, the damage suffered in terms of employment and earnings will leave deep rooted impressions. Job losses have to be filled and more importantly the return to normalcy phase will be slow due to social distancing practices, ongoing concern over health, and the desire for greater precautionary savings.
Businesses have their share of worries. The high debt levels, increasing uncertainty over the outlook, post-crisis overcapacity (particularly in hard-hit sectors, e.g. airlines, hotels, energy) will restrain rebound in capital spending.
Some companies may see opportunities from this crisis. For many companies, it will be a W – uncertain and roller-coaster of up and down. For the more lucky ones, online games per se, its likely to be an upward trajectory.
Other important factors are Consumer habits, power dynamics structure and regulatory stance. When it comes to habits, it is very unlikely for customers to go back and use retail stores when they have comfortably used online services.
There is hardly someone who doesn’t use Netflix or Amazon prime video these days. The movie studios started releasing moving online. A deeper implication is that movie theatres are bypassed and will soon lose their power over the distribution channel. Here, the power dynamics structure is hampered.
Initiatives which were initially rejected by regulators and competitors are now being encouraged. Whether the stance has changed or not will play a role in guiding companies to take adaptive measures.
The Table shows India’s absolute Gross Domestic Product (GDP) is likely to struggle to even come back to the 2019-20 level by 2023-24.
Some experts predict that it will likely be an “elongated U-shape” recovery for India. The inadequacy of fiscal stimulus and weakness of the economy due to pandemic are the prime quoted reasons.
HDFC’s Abheek Barua thinks India is headed for Swoosh shape. But chief economic advisor KV Subramanian bets on a nice V — contraction, then sharp recovery. Barua bats for Swoosh by arguing that “lack of coordination among states, labour shortage and income declines” will hit both demand and supply.
But, given the high number of unknowns, it would be hard to accurately predict which trajectory will be seen.
It is also predicted that if there is no second wave of Covid-19, India can expect swift normalization from negative growth levels to the pre-covid levels of 5% and a gradual recovery to 7% by the second half of the next fiscal (2021-22).
– Abividyaa
