This gets us to the “k-shape” trajectory. We should start from a simple observation: GDP growth aggregates the performance of the various sectors of the economy which even in normal times can be quite different. Typically, export-led growth favours manufacturing, while services thrive when private consumption leads.
There is always a measure of “k-shape” in the way our economies operate. The pandemic makes the divergence more salient. On one end of the spectrum industries dependent on physical contact are struggling, and on the other, firms where the business model is to make physical contact of mobility redundant (think cinemas versus streaming platforms).
The “K-shape” recovery resembles the “90 per cent economy”, an expression coined by the Economist last spring, a state of the world in which some sectors of the economy are permanently impaired while the rest continues to grow on trend.
In this case, after the initial shock – the loss of activity in the most exposed sectors – the economy takes a very long time to fully recover to the previous level, but without necessarily going through many episodes of contraction in aggregate activity.
We are not convinced such a “model” is sustainable.
Indeed, we think that a permanent impairment of a significant share of the economy would have some nasty spill-over effects to the better protected sectors. Firstly, the most exposed sectors happen to be labour intensive, i.e. their share in total employment exceeds by far their share in aggregate output.
A large segment of the workforce is left unemployed, thus dealing with a drop in income which would have a significant detrimental effect on aggregate consumption, reducing activity in all the sectors of the economy.
To make this point very concrete, an employee of a cinema being laid off is not necessarily going to raise his or her Netflix subscription.
Beyond this direct impact, this unemployed segment of the workforce would have to be reallocated to the rest of the economy.
On top of the unavoidable frictions due to skills mismatch for instance, at least initially this labour market slack would depress wages for the entirety of the workforce, thus affecting aggregate consumption, as sluggish wage growth would mean people having less disposable income, and so spending less in the economy as a whole.
Finally, permanently impaired industries would generate “stranded assets”, that is assets which no longer have a market value.
This would have adverse consequences for the banking sector for instance, who would have to write down the value of any loans secured against those assets.
