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India's GDP contracted by -23.9 per cent in the previous quarter. As the pandemic affects some countries more than others, economists now view most economies losing its current recovery momentum, snuffing any signs of a quick return to pre-pandemic levels this quarter. Image Credit: PTI

Dubai: As the pandemic affects some countries more than others, economists now view most economies losing its current recovery momentum, snuffing any signs of a quick return to pre-pandemic levels this quarter.

“The extremely uneven distribution of the pandemic’s pain will leave economic and social scars, hampering the recovery of the global economy,” cautioned Nariman Behravesh and Sara Johnson, global economists at IHS Markit.

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“One of the most troubling and challenging aspects of the current recovery is its glaringly unequal and inequitable allocation of pain across demographic and income groups, industries and economies.”

K-shaped economic recovery?

As the economy struggles to shake off the pandemic effects, worries are growing that the recovery could look like a K – one where growth continues, but is uneven, split between sectors and income groups.

“Although the unbalanced allotment of recession and crisis costs — sometimes called a K-shaped cycle — is not an unusual feature of recoveries, the difference in the prospects of the ‘have nots’, the ‘haves’, and the ‘have much more’ is especially stark in the post-COVID-19 world,” the economists warn.

After a record-breaking drop in second-quarter real GDP in most of the world’s, the third-quarter rebound is likely to be unusually strong, but after that, however, they revealed that they expect recoveries in most of the top economies to falter — as evidenced by high-frequency indicators.

Reasons for uneven recovery

The reasons for fading growth are well understood, one being continued extreme caution on the part of consumers and businesses, until an effective vaccine becomes widely available, which is not likely until mid-2021, the economists added.

The economic drag is also attributed to a surge in layoffs and bankruptcies, rising levels of debt and financial stress, despite massive monetary stimulus and record stock prices, much weaker fiscal stimulus going forward and continued sizeable increases in virus cases in some countries and pervasive flare-ups in others.

The K-shaped recovery brings back the bifurcation of the economy during the Great Financial Crisis, which is about the growing inequality seen since the early 1980s across the country and the economy. When looking at a K-shaped cycle now, the upper path of the K is financial markets, the lower path is the real economy, and the two are separated.

Disconnect between economies, markets

Among economists, a renewed rise in new COVID-19 virus infection rates had been increasing the risk of a W-shaped economic cycle. A ‘W-shaped’ recovery is when any economy passes through a recession into recovery and then immediately turns down into another recession.

However, compounding these concerns in the alphabet-obsessed economics profession is the dichotomy of the stock market versus the real economy, especially considering that 52 per cent of the market is owned by the top 1 per cent of earners – essentially favouring the wealthy.

“The demand for high-end goods thrives while many go hungry. Evictions rise in poor neighbourhoods as suburban housing booms. Work from home is an option for highly skilled workers, but not for others in low-skilled service jobs,” the economists explained.

“Similarly, companies in the technology, online retail and entertainment, biotech and pharmaceuticals, and work-from-home services flourish. Other sectors such as energy, banking, and utilities languish. This disparity is reflected in the stock market, where the recent record run was largely fuelled by the tech sector.”

Uneven economic recovery hurt prospects

With the global economy currently in its deepest recession since World War II, there was earlier reason for hope as nations worldwide reopened after the worst of the pandemic in March, with the economic impasse seen ending in record time. But economists later viewed that any rebound would be brief.

The divide among the world’s economies is also glaring, with Europe and some of the emerging world experiencing much deeper downturns than mainland China, South Korea, and the United States, noted IHS Markit, which publishes widely watched surveys of business and economic activity seen worldwide.

“There has been a vigorous debate over the impact of the lockdowns on the deep economic and social wounds of the past six months. Both academic research and empirical observation suggest the unequal effects of the pandemic are largely the same with and without lockdowns,” the economists said.

“Sweden, which did not institute a lockdown, has suffered high per-capita death rates and a deep recession. At the same time, India’s severe lockdown has not prevented a sharp rise in infections rates yet triggered the worst downturn in four decades.”