Posted by Graham Street, Partner
Alphabet recovery V-, U-, W-, L-, K ?
The economic impact of Coronavirus and the subsequent lockdown is clear for all to see. But depending on where you look there is optimistic talk of a recovery. What is less clear is what ‘shape’ this recovery will be. V, L, K? Welcome to a world of economic alphabet soup.
The V-shaped recovery
This is the most optimistic model and Andy Haldane, The Bank of England chief economist has predicted a quick in-and-out V-shaped recovery. A rapid fall followed by an equally rapid bounce back. Unemployment and inflation may dent and widen this prediction, but it certainly does create the most optimistic model for things quickly ‘going back to normal’ – whatever that means.
The U-shaped recovery
Others, such as the IMF, are forecasting a U-shaped recovery with a stagnate economy for the next 2 years before growth returns. This coincides with predictions from The International Air Transport Association (IATA), which does not expect flights to return to 2019 levels until 2023.This U shape recovery may be likely in the absence of a vaccination against COVID-19 and the growing likelihood that some forms of restriction will remain for the foreseeable future.
The W and L shaped recovery
This model is characterised by a fast decline and recovery, followed by another fast decline and recovery. This model could be realised if there is a subsequent economic recession or a second wave of coronavirus, even if limited to a few places like Leicester.
Some pessimistic economists are even predicting an L-shaped trend. This is nothing to do with ‘Lockdown’ but a nightmare scenario with no recovery to a new low and staying there for a long time.
The K- shaped recovery
Now Ian Cowie, financial journalist at The Sunday Times, has predicted an uneven K-shaped recovery, with some sectors rising rapidly while others slide on a descending path. Clearly technology businesses, including cyber security and data centres are the key beneficiaries of working from home. Whereas restaurants, bricks-and-mortar retailers, and even gyms will face permanent disruption from digital cost-cutting disruptors.
There are also less obvious ‘losers’ in this model – for example the make-up and beauty industry, as reduced consumer buying power could meet less demand as people stay at home.
It feels a new way of thinking about the economy is required to actively manage a K-shaped diversification programme, ensuring the UK has enough exposure to the winners – tech, environmental and healthcare, whilst providing tactical support to prevent too many losers. We will need innovative solutions and management teams to address both parts of the K.
Positive signs all around us
Investor confidence has remained for businesses in industries that innovate and/or benefit both the climate and economy going forward. The electric vehicle sector is key to meeting government targets set in respect of climate challenges in the long term and this sector sits in harmony with calls for a refocusing toward sustainability in the economy. For example, just recently Arrival, a client and world-leading UK electrical vehicle manufacturer, is expanding with a second new factory.
Whilst another one of our clients, retailer All Saints, has just completed an innovative turnover-rent lease on its stores to ensure its survival and to work in partnership with its landlords.
Whichever shape letter the economic recovery turns out to be we will need more sophisticated approaches to predict an ever more complex interlinked economy and create strategies for economic resilience against future volatile global events – perhaps we need an R shaped economy.
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