Over the last few months there has been a lot written about the shape of the recovery that will occur in the wake of this Covid-19 related economic crisis, however there is a new letter that governments and investors alike are starting to look at, a K-shape recovery trajectory, the divide between the haves and have-nots. The theory goes with a K-shaped recovery some areas of the economy, both personal and corporate, have either fully recovered or indeed are even stronger than before the pandemic, while others are still on the downward slide with little to no light at the end of the tunnel.
The clear winners first and foremost are of course the technology companies (NASDAQ up over 34% year to date), those along with the likes of Amazon and Netflix. Those white-collar workers who are now also working from home for at least part of their week are seeing big falls in their outgoings with more disposable income than before the pandemic hit.
At the same time, there are clear losers from the pandemic. Commercial real estate owners (landlords here in London especially will be having a few sleepless nights) hospitality and travel are good examples of sectors that face a lot of uncertainty right now. Many companies in these sectors may never recover.
A K-shaped recovery also brings into focus the divergent experiences of individuals dealing with the coronavirus. Many white-collar workers are able to work from home, to continue seamlessly with their jobs and potentially avoiding exposure to the virus. Others that do not have such benefits or cash safety nets must report to a physical location to work.
The major implication would be that both monetary policy accommodation and fiscal policy assistance will continue for longer due to central banks and governments having to support the ‘have-nots’ for longer whilst knowing such schemes are benefitting those ‘haves’ at the top of the pile. As the Washington Post stated, a K-shaped recovery will see ‘those at the top of the heap strengthen their positions while the rest see their fortunes further degrade’.
However, when it comes to a country’s GDP, there is an argument to be made (in developed countries at least) as to how much those people at the lower end of the ladder were actually adding to the economy before the crisis. Workers on low pay, zero-hour contacts or seasonal jobs usually live hand to mouth on a weekly basis. If over the next foreseeable future the powers that be continue to keep the taps fully open, maybe those at the bottom get back to where they were 12 months ago, whilst those ‘haves’, both households and companies will continue to be awash with cash looking for a home.
With deflation being another debate polarising opinion among governments and economists alike, we agree there has been a deflation shock and there is very little inflation in the system at the moment. However, here at SSC there is one quote we are fond of and that has served us well over the years.
When crossing the road make sure you look both ways.