From V-shape to K-shape: how are economies recovering from the pandemic?

Now that most economies are reopening, the question is how the various sectors will recover. From U-shape to V-shape and even K-pattern, just about the entire alphabet of outcomes is possible. What is becoming clear is that a steep upward swing isn’t on the cards for every area, so it’s important to remain vigilant and monitor your credit management more closely than ever.

The corona virus hasn’t only affected society; it has also had a severe economic impact on many companies in various sectors. To reduce the negative effects, governments introduced support measures. In addition to the effect of the reopened markets, the gradual withdrawal of those support measures is also affecting the recovery curve of European companies.

 

V-shape: best case scenario

In the ideal scenario, the crisis would occur in a V pattern. This means that after a period of economic boom, we enter a deep trough for a while but just as quickly return to the level before the crisis. For a long time, experts saw this as a plausible outcome in our current situation. However, experience has shown that infection rates surge regularly and we’re not yet rid of the covid spectre.

 

U-shape: patience is rewarded

The U-shape closely resembles the V-pattern, only the recovery here takes longer and will continue for a few more months to return to pre-COVID levels. In EY’s Global Capital Confidence Barometer, more than half (54%) of global executives said they expected a U-shaped recovery last year. While a U-pattern is still a possibility for some sectors, many sectors are showing a more erratic recovery pattern. 

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W-shape: up and down

The W-shape has the same characteristics as the V-shape but it repeats itself before true recovery is achieved. This is a scenario that the hardest-hit sectors are now likely hoping for. We can also link the W-shape to government support measures. Some sectors had their recovery fuelled by government support, and once that disappears, a temporary relapse is possible.

L-shape: the doomsday scenario

In an L-shape scenario, there is no complete recovery. The economy falls drastically and does not return to its original level, even after a few years. Examples of an L-shape scenario include the real-estate bubble in the United States of some fifteen years ago and the Greek recession between 2007 and 2016.

K-shape: most likely

A K-shaped recovery indicates a recovery pattern that differs from sector to sector and company to company. The part of the economy that recovers quickly is represented by the upper part of the K, while the lower part represents the parts of the economy that are recovering extremely slowly or not at all. Today we see that many sectors are running at almost full speed, while others are crippled by surges in new infections and continued lockdowns.

Key takeaway

Although everyone was hoping for a V-shaped recovery, a K-shaped pattern seems most likely. It is therefore important to remain vigilant and apply strict credit management procedures.

A combination of automated credit management processes, software that allows customisation and, of course, good communication should ensure that your working capital isn’t under pressure due to too many outstanding invoices.

 


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