With global equity markets rising and global economic growth steeping falling – forming two forks of a ‘K’ – recently, consensus seems to be building of a ‘K-shaped’ recovery
As the coronavirus crisis unfolded, economists and market participants have been debating about the shape of the global economy. The options that had largely been considered included a U, V, W recovery. Now, with global equity markets rising and global economic growth steeping falling – forming two forks of a ‘K’ – recently, consensus seems to be building of a ‘K-shaped’ recovery.
However, given the past experiences with pandemics, the International Monetary Fund (IMF) had warned about it much earlier. In its report dated 11 May, IMF cautioned that major epidemics in this century have raised income inequality and hurt employment prospects of those with only a basic education while scarcely affecting employment of people with advanced degrees. Rising income inequality is a key characteristic of a 'K shaped' recovery.
IMF analysed five major events—SARS (2003), H1N1 (2009), MERS (2012), Ebola (2014) and Zika (2016)—and traced out their distributional effects in the five years following each event. “On average, the Gini coefficient—a commonly-used measure of inequality—has increased steadily in the aftermath of these events. Our measure of the Gini is based on net incomes, that is market incomes after taxes and transfers. Our results show that inequality increases despite the efforts of governments to redistribute incomes from the rich to the poor to mitigate the effects of pandemics," it said.
Further, the IMF’s analysis showed that after five years, the net Gini has gone up by nearly 1.5%, which is a large impact given that this measure moves slowly over time.
In short, the divide between the rich and poor would worsen from hereon.
Interestingly, one can see a similar pattern in the stock market where the technology sector rallied to all-time highs, while cyclicals significantly lagged. With a large population confined to homes, resulting in higher dependence on the internet, technology stocks are seen as the key beneficiaries of the coronavirus crisis. On the other hand, the rest of the global economy came to a standstill impacting sectors such as airlines, energy, real estate and hospitality, among others.
"This has created enormous inequality not just in the performance of economic segments, but in society more broadly. On one side, tech fortunes reached all-time highs, while lower income, blue collar workers and those that cannot work remotely suffered the most" JP Morgan Asset Management Inc. said in a report on 31 August.
Global central banks have been on an easing spree to tackle the demand downturn. Governments have also responded to this crisis via massive fiscal measures. However, economists say, while policy will have to be aimed at addressing the challenges on inequality at corporate and individual levels, until a medical solution is found, policy may help only to an extent.