Covid has shocked the economy out of its torpor
Despite the hardships, it is possible that the pandemic will turn out to be a positive economic event
The International Monetary Fund, no less, has announced it, so it must be true. Only this time, the IMF’S army of economists might actually be right; in contrast to the financial crisis a decade ago, Covid is unlikely to inflict much, if any, lasting damage on advanced economies, with many of them expected to have recovered all the growth lost to the pandemic by the end of next year.
Just to be clear, this is not merely about economies returning to precovid levels of GDP; in most cases including the UK, rapid vaccine rollout should enable this to happen far sooner.
Rather, what the IMF is saying is that less than two years hence, most advanced economies will be almost as big – actually even bigger in the case of the US – as was anticipated before the pandemic struck. In broad brush economic terms at least, it will be as if Covid never happened. Compare that to the financial crisis, which inflicted permanent wounds, such that even today GDP in many Western economies remains considerably lower than it would have been had growth followed its ex ante path.
For what is deemed to be the biggest economic contraction since the Great Frost more than 300 years ago, that would be quite an outcome, turning much of the doom-laden narrative of the past year on its head.
All this raises an intriguing possibility – that despite the hardships and the devastating loss of life, Covid may, in the round, turn out to have been a positive economic event.
The starting point for this line of thinking is that far from being an economically crippling approach to the pandemic, lockdown strategies in combination with compensating levels of income and business support have actually saved us from far worse. We only have to look at Jair Bolsonaro’s Brazil to see what occurs when the supposed interests of the economy are cynically prioritised over people’s lives and health. Eventually, the economy will follow deaths and hospitalisations into a destructive downward spiral.
Legally imposed lockdowns are for most of us alien and authoritarian regimes, but they force governments to provide countervailing quantities of fiscal and monetary support that they might otherwise feel under no obligation to provide. In the view of the IMF, the economic contraction would have been three times as big without such support.
Jamie Dimon, chief executive of J P Morgan Chase, goes further to suggest these actions may have laid the foundations for a “Goldilocks moment” of “fast growth, inflation that moves up gently (but not too much), and interest rates that rise (but not too much)”, fuelling a years-long hot streak. But it is not just the unprecedented degree of stimulus applied, which is far higher than anything seen during the financial crisis; coming on top is a likely damburst of demand as excess savings accumulated during a year of effective imprisonment are disgorged into the economy.
A year of Covid has also embedded a number of profound structural changes in the economy, which were happening anyway but have been greatly accelerated by the requirements of lockdown.
These have forced companies to think creatively about how best to survive, promising in turn to kick-start badly stalled productivity growth. Making the economy produce more for less is the magic bullet that causes living standards to rise, and has been the holy grail of chancellors for as long as I’ve been in financial journalism. Similarly elusive it has proved too, especially since the financial crisis. The pandemic has provided the spark that may allow what is sometimes called the fourth industrial revolution to flourish. As if to prove the point, digital investment in the UK economy was four times higher last year than in 2019.
Covid has also put rocket boosters under two other major structural changes – deglobalisation and home working. The first of these trends you might expect to be harmful, in that any barrier to trade is generally thought to be damaging to productivity growth. Yet, like so much of the “Washington Consensus”, this way of thinking has been swept away by the events of the past year; if making economies more resilient and less dependent on “just-in-time” international supply chains means onshoring more production, it is hard to think it an entirely unwelcome development. For too long, we have traded our dignity for the soma of cheaper goods.
The boom in remote working has, meanwhile, helped firms to reduce costs; by enabling decentralised employment it seems almost tailormade for the Government’s “levelling up” agenda. Logically, it makes little or no sense for everyone to be travelling to work at the same time, crammed on to overstretched transport systems, and into extremely expensive, and again overcrowded, city-centre real estate. Repurposing this space for residential or other alternative uses will take time, and cost owners a lot of money, but ultimately it will lead to a more rational, higher productivity economy. To say thank goodness for Covid is plainly silly and callous; but the traumas of the past year may prove just the shock the economy needed.