L’IMPACTE DE LA CRISI

Recovery is K-shaped

The outcome of the crisis may be uneven and affect low-income families negatively

Last May, with the economy halted because of the pandemic, and having understood that normality could not be recovered in a matter of months, the economic vice-president of the Spanish government, Nadia Calviño, spoke of an "asymmetric vee-shaped" recovery, and ruled out a normal, ordinary vee. Some experts ruled out a normal vee, and warned of the danger of suffering a double-u or u-shaped crisis, however, it seems recovery might come in the shape of a kay. 

This alphabet soup may seem incomprehensible, but it makes sense and helps economists explain how the economy will evolve after the outbreak of the crisis. It should be remembered that the fall in the gross domestic product - the indicator that measures the economy - in Spain was of 17.8% in the second quarter, an unprecedented fall since the Civil War. Most industrialized countries in the world suffered similar falls.

But what is the "asymmetric vee" that Calviño spoke of? The vee crisis is the least bad of the crises, and it is named as such because after a rapid collapse of the economy comes a rebound that allows the recovery of previous economic levels, almost as quickly as they fell. The asymmetric vee, however, is worse: in this case, the initial fall in GDP is followed by a slower and more protracted recovery, until the whole economy returns to the same state it was in before the recession.

To illustrate this with figures, the Spanish government predicts that in 2020 the GDP will sink by an average of 9.2% and that in 2021 it will recover, but with a growth of 6.8%, which means that the wealth destroyed in a few months of 2020 will take years to be restored. The Bank of Spain also predicts that "by the end of 2022 the level of activity prior to the crisis will not have been achieved", according to a report published in October.

With the outbreak of a second wave of contagion across the planet and the danger of a third wave during the first months of the next year, some economists are warning of the danger that the current crisis may end up taking a different shape - other than the vee -, either as a double-u or as a u.

In the case of the double-u, something similar to the last financial crisis of 2008 would occur: growth returned in 2010, but in 2011 the GDP fell again three years in a row - which were the hardest years of the recession. In other words, this would mean a double-dip recession.

In contrast, the u-shaped recession would mean that after the initial fall in the second quarter, the economy would remain completely flat for a few months before picking up again. Given the current figures, this scenario can be ruled out.

The danger of inequality

The new letter that has been incorporated for speaking about the end of the crisis has been the letter kay, following the example of several American economists. This recovery would mean that some companies - industrial, for example - would recover quickly, while others - tourism or hospitality - would continue to suffer for many more months. It is therefore a very uneven recovery, ultimately depending on the sector.

However, what worries economists the most is not that some sectors will recover quickly and others will not come out of the crisis, but that the recovery will also reach various strata of the population in different ways and that, in the end, it will take longer for low-income families to recover their pre-crisis standard of living than for high-income families.

"The post-pandemic world could experience even greater inequalities" than before, wrote Nobel economics laureate Joseph Stiglitz in the IMF magazine. Stiglitz and other experts warn that the sectors most affected by lockdown are those most dependent on precarious jobs - waiters, shop assistants - and therefore, a bad performance of these sectors has a direct impact on the most vulnerable workers.

In addition, the pandemic will increase robotization processes in many companies, which will destroy low-skilled, i.e. low-wage jobs. Stiglitz points to the need for public sector intervention to redistribute wealth and prevent the poorest from suffering further from the crisis.

Fast recovery

The vee recovery is the one that leads to a shorter crisis, since the economy falls for a short time and quickly recovers to pre-recession levels. This type of recovery was ruled out at the beginning of the current coronavirus crisis.

Long recession

The u shape is used to speak of a crisis with a sharp drop in the economy, which then remains depressed for a long period of time before growing again, at a relatively strong rate.

Depression

L-shaped recovery is the worst possible scenario: it is not really a recovery, but a depression. After a collapse, the economy remains at a low point with almost no chance of recovery.

Slow recovery

Most economic institutions are predicting an asymmetric vee crisis in Spain and in much of the world: a sharp decline followed by a slow recovery, which means it will take several years to return to pre-recession levels.

Double-dip recession

The double recession or double dip: a first recession with a quick recovery, but followed immediately afterwards by a second collapse. The 2008-2013 crisis in Spain had this double-u shape.

More inequality

The last letter incorporated is the letter kay, which lately some economists attribute to recovery of the covid-19 crisis. After a fall in GDP, some sectors will recover fast, and others will sink even further.

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