World economic recovery: K-shaped scenario

Tuesday, 2020-09-01 12:31:53
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A worker is seen wearing a mask while organising merchandise at a Walmart store, in North Brunswick, New Jersey, US, July 20, 2020. (Photo: Reuters)
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NDO – Since the COVID-19 pandemic broke out and cast a shadow over world economic growth, analysts have made many comments on recovery scenarios for the global economy, of which the K-shaped recovery model is considered the mainstream prediction at the moment.

At the onset of the disease, most analysts predicted the world economy to recover in a V-shaped scenario – a sharp bounce back from a rapid descent. Some economists were more pessimistic forecasting a U-shaped model – the economy falls into recession for a long time before regaining growth momentum, or a W-shaped pattern - a short recovery followed by another downturn as lockdowns are reimposed.

However, in recent days, the K-shaped scenario has emerged as a new recovery model of the world economy. The model was introduced recently by the Saudi-based daily newspaper Arab News, receiving the attention and consent of many analysts. In this scenario, a vertical decline – as equity and oil markets suffered in March and April – is succeeded by not one, but two recovery patterns, one sharply up and one sharply down.

In fact, global economic developments over recent months show that the K-shaped scenario is happening in the world economy. Accordingly, the majority of large economies have experienced a strong vertical growth decline at about 10%, exceeding all previous predictions. The number of economies forecasted to have positive growth this year can be only “counted on the fingers”, such as China and Vietnam. The K-shaped recovery model can also be seen in each economy with conflicting developments. For example, in the world’s no. 1 economy, the US, equity markets have recovered so fast that they have reached all-time highs, with the S&P 500 index recovering all the losses of March and more. That represents the upward tick of the K.

Meanwhile, plenty of other indicators are heading the opposite way. Economic output as measured by gross domestic product (GDP) is still down, unemployment is rising, and bankruptcies and indebtedness statistics are all heading the other way. That’s the downturn leg of the K.

However, whichever recovery scenarios analysts determine, they now share the same opinion that the world economic outlook is “grey”, the period of decline continues to be prolonged and many difficulties are still ahead. Economic statistics for Q2 2020 revealed that the US has experienced the biggest economic decline since 1947 - the postwar period, with a 9.5% GDP decrease in Q2 compared to the previous quarter, equivalent to a record slump of 32.9% over the same period last year. Statistics are even worse for the Eurozone, as its Q2 GDP went down 12.1% from Q1, bringing the total growth decline for the whole year to about 40%. Nonetheless, the aforementioned statistics are not the “worst falling point” of the world economy yet. The Sydney Morning Herald recently warned that the chaotic numbers and the strong economic impacts caused by COVID-19 in Q2 2020 have caused investors to make false predictions in stating that the “worst part from the pandemic’s impacts are now behind us”.

In fact, with the second and third waves of COVID-19 breaking out in some areas, Q3 growth statistics of economies may be even “darker”. Experts recently warned that even if a COVID-19 vaccine is successfully developed and widely and rapidly distributed to all countries, the world will still be in a state of low and uncertain growth at least until the end of 2021. Additionally, the growing US-China tensions and disagreements between great powers on the pandemic fight and several other international issues have put the task of reviving global economic growth in the face of numerous obstacles. Sputnik recently quoted the latest report of the International Monetary Fund (IMF) calling on the US and China to lead the fight against the COVID-19 crisis. According to IMF estimates, developed countries need to allocate up to 20% of GDP for measures to maintain economic activities to overcome the crisis. Meanwhile, developing countries can only spend no more than 5% of their GDP on these measures. Therefore, global coordination is of great significance to the battle against the pandemic and economic recession.

In the aforementioned context, to extend the upward stick of the K in the global economic recovery model, governments must see the challenges more clearly and apply more drastic measures in the pandemic fight and economic recovery. In addition, the current battle to cope with COVID-19 and revive economic growth is now requiring all nations, especially major powers, to unite on a common front.