Economic recovery theory is now in alphabetical shape

Nironjan Roy

28 February, 2021 12:00 AM printer

Economic theory, forecast and prediction play a very important role in carrying out business and financial activity in modern life. The dominant role of technologically advanced applications coupled with ever-fast communication means have tremendously influenced every action in economy which is further attributed by the prevailing economic theory, forecast and financial analysis. Any future investment and even sometimes, current expenses are also undertaken based on market theory and forecast. The big data environment using technological tools has heightened the importance of forecast and analysis in our daily financial activity.

Historically, the economic direction of a country and even the world economy are found to be aligned with economic forecast and analysis developed by  renowned economists, think tank, analysts and industry experts. Economic theories, forecasts and predictions are developed taking historical data, prevailing economic conditions, future trends and  government as well as regulatory policies into consideration. So, economic response is found to be consistent with the prediction and forecast. However, in some cases, we have experienced gross deviation or even complete failure of prediction/ forecast, but in most cases it holds true.

Its importance in economic crisis: The importance of economic forecast and prediction rises when a country passes through a difficult situation arisen out of economic recession or downturn. In order to revamp the falling economy, the government’s policymakers and institutional investors have to come up with some policies and stimulus measures what is designed based on recommendations described in economic theories, forecasts and predictions, which come from renowned economists, think tank, analysts and market experts. Even common people, particularly consumers and retail investors, eagerly wait for comments from economists and market analysts for their expenditure and investment decision. Historically, economic recession and downturn have been reversed and economic normalcy were restored applying the economic theory and strategy recommended by economists. The great depression in 1930 was recovered using the Keynesian theory while the financial meltdown in 2008 has been recovered undertaking extensive bailout package recommended by financial analysts and market experts. Therefore, whenever a country falls into economic crisis, economists, analysts and market experts are under pressure of coming up with new theory, forecast and prediction. This pressure comes not only from government, but also from common people who eagerly wait to hear from them.

Stock and housing markets are exceptions: World economy particularly developed economy fell into sudden shock when the whole world had virtually gone into shutdown in order to battle the invisible Coronavirus. It is almost one year; the economic and business activity has come to almost standstill as all non-essential activities have remained almost suspended. Millions and millions of people have been out of employment while innumerable small and medium businesses are on the verge of bankruptcy. Death rate is so high in the developed world that the governments of these countries are scrambling hard to save people’s lives setting aside the country’s economy and business. People are surviving with government benefit and only exception is stock market and housing market. Stock market in the developed world, specially in the USA and Canada, are so sensitive that it instantly responds to even any small news in anywhere in the world. Simple OPEC’s oil production cut or border tension between China and India heavily stirred the stock market. Whereas this supersensitive stock market has not only sustained, but has also risen during the last one-year lockdown situation, the reason of which remains beyond understanding of common people and even market experts as well. Similarly, slight drop in unemployment rate stirs housing market and causes drastic fall in both price and volume, but this time housing price is abnormally rising during the pandemic, the reason of which is not known to us yet.

Cause of rapidly changing economic recovery theory: The unique feature of present crisis is that the root cause of the crisis is the deadly virus against which there is no effective tool to fight although the vaccine rollout has just commenced. This situation is so volatile with rapid changing pattern that it has been almost impossible for economists, think tank and analysts to observe and come up with appropriate recommendation. Since people and policymakers always look forward to listening from them, they also remain under pressure and try to say something showing some hopes. But, the pandemic-hit economic condition has been so volatile and unpredictable that as soon as one theory is developed, the situation changed proving ineffectiveness of that theory and entailing economists and experts to come up with another new theory. Theory and forecast have been emerging one after another in order to cope with the evolving scenario in the economy driven by the Covid-19 pandemic. So, theorists have defined their theories and forecasts using alphabetical character.

Alphabetical shape of economic recovery:  At the outset of economic shutdown caused by the pandemic, economists came up with “V” recovery theory what states that economy will go down very rapidly. However, it will register sharp rise soon. Economy’s sharp dive and fast rise have been described as ‘V’ shape economic recovery by  economists. The rational of the proponent of ‘V’ recovery theory was that the economic fundamental was so strong in pre-pandemic era that sharp fall in economy caused by the Covid-19 pandemic will bounce back with equal speed. Some economists from European countries have defined the pandemic- shattered economic scenario from different perspective as they described the recovery as “the bird’s wing” what implies that massive contraction is always followed by rapid turnaround and then takes the shape of plateau. As the pandemic continues to prolong keeping the whole economy fully or partially paralysed, the ‘V’ recovery theory did not work. So, some economists and market experts came up with new recommendations describing it as “W” recovery theory what implies that there will not be sharp rise and fall during a short span of time; rather economy will move with repeated ups and downs over the pandemic era.   Some economists, however, believe in “I” shape economic situation where economic growth straight dropped without any sign of recent bounce back. There are other groups of economists who are the proponents of “L” shape economic theory which states that the pandemic has caused massive economic damage leading to prolonged stagnation what will prevail over a period of time. There are other groups of think tank who have come up with a new idea describing the pandemic-ridden economic situation with letter “K” in order to show that the pandemic has further widened the gap between the haves and have-nots.  

Most appropriate ‘K’ economic theory: According to “K” shape economic condition, the pandemic has not affected everyone equally, rather widened existing inequalities. Two inverse stokes of the letter ‘K’ indicates two different arc economically segmented people in the society. The upper stoke represents the high-end affluent society while the lower stoke indicates the low-income or middle-class society. Those who were not in better off situation in pre-pandemic era have been hard-hit and devastated by the economic crisis arisen out of Covid-19 pandemic as many of them have lost their income, exhausted their hard-earned savings and even heightened their indebtedness because of maintaining livelihood by additional borrowing. On the other hand, those who are affluent segment of  society have been extensively benefited amassing their additional wealth by capitalising the pandemic- hit economic condition. From local media, it is learnt that during the pandemic period, the asset of Tesla’s CEO Elon Musk has increased by an estimated 140 billion US dollars while the asset of Facebook’s CEO Mark Zuckerberg and Amazon’s CEO Jeff Bezos has increased by an estimated 100 billion US dollars. Elon Musk, Zuckerberg or Bezos are not exceptions, there are many affluent people in developed world who have been exclusively benefited from the economic condition resultant from the Covid-19 pandemic.

In order to describe the prevailing economic condition, economists, analysts, think tank and market experts have come up with theories one after another describing in the alphabetical character. Whether all of these alphabetical theories would hold true or not, it will have to be seen in the future. However, it is true that “K” shape economic condition has already been proved and established in society. 

 

The writer is a Banker in Toronto, Canada

Email: [email protected]


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