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K-Shaped Recovery

When one sector of the economy rebounds from a recession, and another sector continues to decline

What is a K-Shaped Recovery?

A K-shaped recovery divides an economy into two, with divisions based on wealth, geographic, and industrial characteristics. It is called the K-shaped recovery, because at its most basic, one portion of the economy is bouncing back and increasing in value, and the other continues to suffer the effects of the recession.

 

K-Shaped Recovery

 

When an economy recovers following a recession, different aspects of the economy take on different paths to recovery, and a common scenario is when a certain demographic or industry recovers from a recession before others do.

 

Summary

  • A K-shaped recovery is when one sector of the economy rebounds from a recession, and another sector of the economy continues to decline during a recession.
  • A K-shaped recovery is possible due to the creative destruction of old industries due to the development of new industries and technologies during the recession.
  • Also, government strategies like monetary and fiscal policies used to combat the recession can lead to a K-shaped recovery.

 

Understanding K-Shaped Recovery

The term K-shaped recovery is an unusual form of recovery, as traditionally economists believed that a recession exerts a negative impact on all the industries. However, in a K-shaped recovery, some industries are on a better path to recovery than others and there are three key reasons.

First, as described by economist Joseph Schumpeter, a K-shaped recovery is possible due to the creative destruction of old industries due to the development of new industries and technologies during the recession. Second, government strategies like monetary and fiscal policies used to combat the recession can lead to a K-shaped recovery. Due to the nature of the economic policies, certain industries will benefit more than others. 

Lastly, due to the nature of the recession, it can exert a unique impact on different parts of the economy, especially when a recession is coupled with a negative real economic shock that results in a lasting negative impact on certain parts of the economy.

 

Examples of K-Shaped Recovery

During the COVID-19 pandemic, North America saw a K-shaped recovery where the richer individuals and industries recovered faster compared to the poor.

The tourism and hospitality industries were the hardest-hit economic segment during the pandemic. The National Restaurant Association estimated that roughly 17% of the restaurants shut down permanently, and the ones that were operating experienced a 36% drop in revenue.

On the other hand, the video conferencing industry thrived, as services like Zoom experienced a surge in demand due to the implementation of work from home and online school. As a result of the pandemic, the industry is expected to grow from $2.1 billion in 2019 to $78.5 billion by 2030.

The example of the tourism and video conferencing industry represents a classic K-shaped recovery graph. The struggling tourism industry represents the lower right part of the K shape, and the booming video conferencing industry represents the upper right part. Different industries experienced either an upside or downside during a pandemic.

 

K-Shaped Recovery vs. Another Recovery

Apart from the K-shaped recovery, there are other classes of recovery that the economy experiences after a recession, and economists identify them based on letters.

  • L-shaped recovery: An enormous recession where the economy takes more than a year to recover.
  • U-shaped recoveryA sharp decline followed by a time where the economy is sitting at a low point, before finally recovering.
  • W-shaped recovery or double-dip recession: When the economy hits rock bottom followed by a temporary increase and finishing with another decline.
  • V-shaped recovery or hockey stick recovery: When there is a sharp decline followed by a quick recovery.

 

Conclusion

The K-shaped recovery is a prominent pattern seen after a recession, and the world saw it in full effect during the COVID-19 pandemic. It exacerbated the inequality between the rich and the poor, and between the privileged and underprivileged.

In addition, the K-shaped recovery is challenging policymakers as it is difficult to implement stimulus actions to develop all parts of the economy. However, the objective is always a sustainable recovery, either a V-shaped or hockey-stick recovery with a strong rebound.

 

More Resources

CFI offers the Certified Banking & Credit Analyst (CBCA)® certification program for those looking to take their careers to the next level. To keep learning and advance your career, the following resources will be helpful:

  • Economic Stimulus Package
  • Fiscal Policy
  • Milton Friedman
  • W-Shaped Recovery

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!