Yahoo Finance What’s a K-shaped recovery and are we headed for one?
Australians are hoping the reopening of the economy will be swift and permanent, but some experts are warning of a potential 'K-shaped' recovery.
A K-shaped recovery would mean dramatically different recovery rates and financial impacts for different sectors of the population.
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The economy fell by 1.9 per cent during the September quarter, the third-largest quarter-on-quarter fall in Australian history, tailing a 2 per cent fall in the June quarter of 1974 and the catastrophic 6.8 per cent fall in last year's June quarter as the pandemic took hold.
The big drop last quarter was thanks to extended lockdowns in New South Wales and Victoria.
The fall is of concern, with Treasurer Josh Frydenberg describing it as "very much a lockdown story", although the number wasn't as bad as initially feared.
Writing for Yahoo Finance, Stephen Koukoulas said: "All competent economists also know that economic output is charging back in the December quarter and that growth will be strong when those numbers are released in early March 2022.
"That momentum in the economy is set to continue into the first half of 2022.
"Retail sales surged in October, business investment is set to rise at a stellar pace and the inventory rundown that undermined the September quarter GDP will soon be reversed, adding a sizeable chunk to output over the next few quarters."
What is a K-shaped recovery?
A K-shaped recovery happens when different parts of an economy perform at different rates following a recession.
The financial performance of different sectors, industries, groups and people within an economy always differ to some extent, but a K-shaped recovery would see that performance diverge wildly, with some parts seeing strong growth and others seeing sharp decline.
Matt Waugh, head of research at accounting firm Findex, said the phrase was novel, although there were historic instances of a K-shaped recovery.
"It’s a relatively new terminology which was brought to life to explain the sharp recession during 2020," he said.
"We saw consequent uneven recovery, where some sectors and industries were clear winners, while others were severely challenged, such as tourism and hospitality."
What causes a K-shaped recovery?
Waugh saiud lockdowns and remote working caused a divergence in the performance of certain sectors of the economy.
"From a COVID perspective, we saw technology, software and online shopping thrive whilst the population [was] locked down and working from home," he said.
"On the other hand, retail, travel and hospitality struggled, and are still yet to recover.
"We need to also apply this to society at large. Job losses and income cuts were significant to some while others made more money from the opportunities COVID presented. In other words, some segments encounter a V-shaped recovery, while others face an L shape.
"The uneven growth and recovery was also fuelled by the strong fiscal and monetary support by the government and central banks respectively.
"The support - specifically the lower interest rates - is necessary to avoid long-term recession. However, this mainly leads to growth of financial assets and has a lesser impact on [the] real economy."
How the Aussie economy has fared
The COVID-19 pandemic and its associated lockdowns have had a major impact on Australia's economy, as told by the sharp fall in GDP last year.
Household spending declined by 4.8 per cent in the September quarter, while spending on services fell 5.8 per cent.
However, the household saving ratio, which represents the total amount of net savings as a percentage of net household disposable income, increased a whopping 8 per cent to 19.8 per cent.
Waugh said the GDP fall in the the September quarter followed "four quarters of positive growth, which recovered the 2020 COVID-19 losses".
"The most recent print of the GDP is -1.9 per cent, which is well ahead of the market's expectation of a -2.7 per cent decline," he said.
Should Australia be worried about a K-shaped recovery?
Waugh said a K-shaped recovery couldn't be ruled out.
"Potentially. There are definitely sectors and segments of the market that continue to struggle," he said.
"If you dig deeper into unemployment data, it is obvious that the lower-to-medium-income earners suffered significantly more job loss or wage cuts than those on high wages.
"Solving this is not a simple equation. How do you ensure the recovery is even if people are still unsure about travel, or if they have changed their habits in terms of working from home and they don’t visit their daily café anymore?
"The question is if we are living out a K-shaped recovery, who does it leave behind? Small business owners in particular have been heavily affected.
"Low-income earners are even more unlikely to afford a house now as asset prices soared with low rates enabling growth."
Waugh however is of the view that the latest GDP numbers are "well within the expectations of the economy heading in a positive direction".
"The negative GDP was really driven by the extended lockdowns we saw during the period," he said.
"Unemployment peaked at 7.5 per cent during mid-2020, however, it has since fallen to about 4.6 per cent in September, slightly rising to a 5.2 per cent print in October.
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