COVID-19 & Recession Curves Part 2: Why the Old Curves Might Not Work

By Varshika Prasanna

Why are the traditional shapes insufficient in describing the COVID-19 recession? What are the emerging shapes that depict this recession more accurately?

Most traditional curves occur due to some economic phenomenon which causes fluctuations in GDP. However, the COVID-19 crisis is not like other recessions. Since the coronavirus pandemic threatens the health of people, decisions made must keep in mind this concern, and not just economic revival. This makes the COVID-19 triggered recession particularly problematic, and traditional shapes of recession curves might not be applicable to this unique situation. Thus, new shapes have come up that could potentially describe the COVID-19 recession better.

K shaped Recovery Curve:

A K shaped curve occurs when the economy recovers unevenly and there’s a separate trajectory for two segments of the society. This is unlike the traditional curves, which show uniform recovery across sectors, industries, and groups of people. A K shaped curve is a median between a V curve and an L curve.

In a K shaped recovery, the socially advantaged experience a V shaped recovery while the socially disadvantaged experience an L shaped recovery. Certain sectors like technology, retail & software have recovered from the recession and are rehiring again, while other industries like travel, entertainment, food-services & hospitality continue to decline. This means that a K shaped recovery leads to a significant change in the structure of the economy and certain economic outcomes will fundamentally change before and after the recession.

The financial markets have recovered and grown, but the economy as a whole is still worse off than pre-COVID. 84% of the stock market is owned by only 10% of the households. While the stock market continues to rise, the GDP and employment rates decline. Unemployment rates in the US have reached an all time high of 8.4% nationally. With the implementation of social distancing guidelines and work from home options, the hardest hit are those with low wage jobs i.e. the socially disadvantaged.

What are the repercussions of a K shaped curve on the economy? It means that there has been a destruction of the old technologies used before the recession, which have been replaced by new technologies during the recession. This ‘shift in technologies’ will most strongly affect low wage jobs, whose skills will be longer be required for the functioning of the new economy. Therefore, this will increase the structural component of the natural rate of unemployment. Moreover, it implies that the fiscal and monetary policy implemented by the United States benefit some sections of society more than others.

Reverse Square Root Shaped Recovery:

The Reverse Square Root curve starts out just like a V curve, rebounds partially, but eventually ends up flatlining. A quick bounce back just after a steep decline, followed by sluggish, almost flat economic growth. The tail is much lower than the pre-recession levels, possibly because households and businesses do not want to invest due to low levels of consumer and business confidence. However, the COVID-19 recession is not the first time this term has been used. The term was coined by famed investor George Soros who used it to describe the 2007-09 recession.

Deutsche Bank senior U.S. economist Brett Ryan believes that the recovery curve is not going to be a straight line as the nature of the virus is such that one can expect several bumps along the way. The unemployment rate fell from 13.3% in May to 11.1% in June. However, after this temporary boost, the pace of the recovery continues to be slow. A possible explanation for this could be the surge of cases in certain US states which would have hindered the reopening of the economy. Furthermore, the fiscal support provided by the United States which supported retail sales in May will dwindle soon.

In the absence of a vaccine, consumers will have to settle down to a new normal, where social distancing and stay at home orders are not lifted. This indicates that it would take a long time for economic growth to reach pre-pandemic levels.

Swoosh Recovery:

The ‘Swoosh’ recovery, inspired by the Nike logo, is an improvement on the traditional U shape. A swoosh recovery signifies a sharp decline in the GDP followed by a painfully slow recovery. It means that the depth of the economic contraction coupled with the soaring levels of unemployment makes it incredibly difficult for the economy to reach 2019 levels of output.

Social distancing has made simple everyday activities such as going to the movies, eating out, or visiting beauty salons virtually impossible. Airlines do not expect passengers to return to pre-pandemic levels until 2022. Restaurants, if open, will have to operate at less than full capacity to abide by social distancing regulations. Consumers worried about the threat of the virus will not return to original habits very easily.

The lack of clarity regarding the exact nature of the pandemic results in uncertainty about the way in which the economy will recover. The traditional curves (V,U,W and L) have been used successfully to describe previous recessions; however, a recession caused by a pandemic makes public policy to revive the economy tricky, as the focus should ideally be on health first and the economy second. The emergence of the new curves (K, Reverse Square Root and Swoosh) shows us that this recession is no ordinary one, and urgent and thoughtful action must be taken by our public policy makers to secure the health and future of the people. □

Work Cited