With growing uncertainty around the economic implications of the Covid-19 Pandemic, the recovery curve of the GDP becomes central to gaining a view of the impact and possible future implications as well. This article attempts to explain the shape and interpretation of the various recovery curves of the GDP while maintaining a centrality on the Indian Economy in particular.
How the Economic Ambivalence took off
“And as a country previously described as “the fastest growing economy in the world” struggles to keep up with a 23.9% quarterly economic contraction, we as a nation look for prospective answers.”
As half the word struggled with one of the greatest healthcare impediments in human history in the wake of the spread of Covid-19, March and April saw complete lockdowns in numerous countries as half the world erupted in hysteria while the other half cried for “a flattening curve”. Fastrack through flickering frames of a rapidly growing, potentially mismanaged Pandemic, the world seems to finally realize the immensity of this pandemic and its consequences for our future. As we turn to compensate for the loss incurred, the economic downturn caused has been one of the central concerns. And as a country previously described as “the fastest growing economy in the world” struggles to keep up with a 23.9% quarterly economic contraction, we as a nation look for prospective answers.
The centrality of most of our questions is based upon a potential and hopeful recovery. However, how does one infer any meaning out of the constant debate that economists around the country are having about K-shaped, U-shaped, V or L shaped recovery curves? What does a trend line establish? What is the basic logical rationale behind all of these notions and why does it matter to me anyways?
The Recovery Curves Explained
Firstly, to establish a pre-requisite, a recovery curve tries to graphically represent the Gross Domestic Product as a factor of time. It uses the GDP as an appropriate measure of the economy and its potential. Now draw a positively sloping curve on the graph representing the pre-covid baseline. This is the trend line which is the estimated growth of the GDP over time, based on, as the name suggests, previously documented trends.
Now with that in mind, we can look at what the shapes of the recovery curve can potentially be and why they are, how they are. The most optimistic one is referred to as the “Z-shaped recovery curve”. The economy suffers a downturn due to the lockdown so the curve dips down from the trend line, and then bounces back up as the lockdown gradually reopens. All of the pent-up demand, the purchases we didn’t make and the trips we didn’t go on during the lockdown, is now expressed as people go out again to engage in such economic activity extensively, which leads to the rise. This rise then reaches to above the trend line as all of that demand is allowed to pile up over time, like winding an elastic band, and then released all at once. After this initial boom, the GDP comes back down to the pre-covid baseline as things go back to “normal”. However, the caveat is that this type of a recovery curve is based on the presumption that the GDP foregone due to the lockdown is simply delayed and not lost forever.
Another type of a recovery curve is the V-shaped curve. The caveat from the Z-shape is now acknowledged here as the assumption is that the demand foregone is lost forever. But once restrictions are limited, the curve goes straight back to the baseline as things go back to what they would have been before. This therefore represents a temporary dip in the economy before everything goes straight back to normalcy.
The U-shaped curve is the pessimism which might be more realistic. The effect on the economic activity continues, even after the lockdown is relieved as the recovery curve gradually recovers and over time reaches back to the baseline. Continuing with the realism, if the lockdown is relieved but then imposed again due to a rise in infections, the curve could be W-shaped as well, showing a temporary increase, a decline and then finally a standard recovery.
However, the considerations should be even more nuanced because recovery depends on a multitude of factors. Many economists have remarked that only considerable developments in treatment, like a vaccine, can allow a full compensation to the baseline since restrictions cannot be fully lifted and this implies that certain arenas such as travel, business, banking and public event organisation will remain constrained for the foreseeable future, which brings with it the dismal prospect of a recession. The policy framework of the government, especially in India, will also drastically shape the economic future.
An Endemic Outlook
India, in particular, is expected to experience a V or a U-shaped recovery. However, this requires us to trace the economy to a couple of years. India’s growth differential with China since the 2000s had kept declining and by 2014 had overtaken the latter. By global standards, the country was doing fairly well. However, 2017 saw India drastically fall behind China. From +6.12% in 2018 to nearly -10.29% projection in 2020, India’s problem with the economic growth crisis is not novel in the slightest and trends can be explicitly traced back.
In 2020 Q2, India has shown the most dramatic decline in economic activity amongst the G7 economies at -23.9%. This resulted from the severe lockdown imposition and lack of compensatory fiscal stimulus. So while India was already on a declining growth trend, the pandemic simply stimulated and aggravated the impending crisis. This leads to the belief that the recovery is unlikely to be shaped as a V but more likely as a U with the curve flattening out as economic growth approaches at a diminishing trend. The Indian economy requires policy and structural reforms at its core to be able to guide itself back to the pre-covid baseline, as citizens look desperately for a “new normal”.