By Guest Blogger Ryan Lewenza
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As Covid-19 hit taking the global economy down with it, economists were quick to define the ultimate recovery in the economy with a letter from the alphabet. The more optimistic bunch called for a V-shaped recovery, where the economy would quickly drop and then recover, looking like a V. The bears out there (and you know who you are!) were calling for the dreaded U-shaped recovery, where the recovery would be drawn out and depressed. However, neither of those scenarios played out and in fact, there’s a new letter that we can add to our vernacular – the K-shaped recovery.
A K-shaped recovery occurs when certain parts of the economy recover faster and more strongly than other parts. Basically, the recovery is uneven, with some (mainly white-collar jobs and professionals) experiencing minimal impact, while others (typically blue-collar workers and lower income earners) suffer disproportionately from the downturn. That’s exactly what we’ve seen over the last year with this terrible pandemic really weighing on certain areas like restaurants, travel and leisure and small businesses.
Below is a cool chart (is that an oxymoron?), which illustrates this concept. I plotted the total aggregate hours worked by all employees for two different groups – professionals and the information technology sector and the services sector including restaurants, leisure and entertainment. Note how the white-collar professions have seen minimal impact to their total hours worked, whereas the service-based areas like restaurants and entertainment have experienced massive drops in their total hours worked.
You don’t have to be a trained economist to deduce this. All you have to do is look around. When I walk down Toronto’s Queen Street I see it everywhere. With the Ontario government shutting down businesses again, who do you think feels it the most? While I sit in my comfortable office at home, small businesses ranging from my local drycleaner, to my local pub and our favourite restaurants, are enduring incredible economic pain and emotional stress right now and are feeling the brunt of this crappy pandemic.
What a K-Shaped Recovery Looks Like
Source: BLS, Turner Investments
Another way to illustrate this K-shaped recovery is by looking at employment rates across different income ranges. For example, those income earners in the lowest quartile (in the US is defined as those earning below US$27,000) have experienced the biggest drops in employment with this group seeing a drop of 19% in employment rates since the pandemic hit. In contrast, those higher income earners (defined as over US$60,000) have actually seen their employment rates rise by 0.2%, as of September.
Low Income Earners are Getting Hit the Most During this Downturn
Source: Opportunity Insights
So we know this is happening and why, but what is the solution to this?
In my opinion there are three critical things that need to happen to turn this around.
First, while I am a staunch fiscal hawk, I believe the government needs to pony up and continue to financially support the hard-hit service sector and small businesses. This includes the continuation of the rent and wage subsidy for businesses, providing loans to small businesses and targeted support to our bars, restaurants, travel and small businesses. Yes this is expensive and yes this will leave us with a lot of debt, but because the governments are making the decision to close businesses to slow the spread of the virus, then the governments need to pay up. As the economy begins to recover and we get control of this pandemic, then governments should create a plan to return to balanced budgets to help get control of the skyrocketing debt. I don’t have much confidence in this current Federal government and our new Finance Minister to do this sadly.
Second, we need the vaccine and we need it fast. While details of the vaccine rollout have been sketchy and unclear, it currently appears that we’ll receive 6 million doses from Pfizer and Moderna by March, which would vaccinate 3 million Canadians (requires two doses). First responders and seniors in long-term care facilities will receive priority, with a broader rollout of the vaccine by the second quarter. Come fall a good percentage of us should be vaccinated, and when this happens we’ll begin to return to normal by going out again to the bars, restaurants and movie theatres. Not sure about you, but I sure do miss hanging with my pals and having some pints, or having a nice diner with the Missus. So, I see these areas recovering strongly next year as the vaccine takes hold.
Lastly, it’s all about job growth and getting people back to work. The vaccine rollout will be critical to this.
During the downturn the Canadian economy lost 3 million jobs in March and April Since then we’ve added back 2.4 million jobs, or 80% of what was lost in the spring. We need to get back to the 19.2 million peak in Feb 2020, and I see that happening over the course of 2021. I’m expecting job growth to slow going forward, but the trend will be up and we should be back above that 19 million level over the next year. This is critical to addressing this K-shaped recovery.
Canadian Employment is Still Down 600k Jobs since Feb Peak
Source: Bloomberg, Turner Investments
Through what I see around me and my many conversations with our clients I know people are hurting from this historic pandemic. These are not just statistics, or some numbers on my spreadsheets. It’s real people with real lives. So we need continued government support, a successful vaccine rollout and job growth to get back to normal, which I believe is on the horizon and will unfold in 2021.
In my own little way I’m going to try to help the service sector and small businesses by purchasing all my holiday gifts for the family through local businesses around town. No Amazon purchases for me this holiday season! Let’s all try to support our hard-hit local businesses this holiday season, as they need us now more than ever.
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.