Post-covid economy
As vaccination programs gather pace around the world, businesses are turning their attention to planning for the post-pandemic economy. What shape will the recovery take and how will it emerge in different sectors? We don’t have a crystal ball, but a look at how past pandemics have ended can give us some clues. One thing is for sure, energy and optimism are on the rise – it’s time to get ready for growth.
Janet Anderson, August 2021
If the experience in the United Kingdom (UK) is anything to go by, the pandemic will end in a shopping spree. In the days immediately after lockdown restrictions were relaxed in April 2021, queues formed outside stores and retail sales surged. After months of online shopping, people were keen for real-life experiences. Demand for hotels, restaurants and other consumer-facing services all soared and factory orders grew at record pace. Business confidence hit a record high, according to figures released by the Confederation of British Industry, as the rebound proved better than expected. Forecasters are predicting gross domestic product (GDP) growth in the UK of 6 percent or over.
A feeling of optimism is emerging in many places around the world. In Germany, which is behind the UK in terms of its vaccination program, business confidence is rising across all sectors, reaching its highest level since May 2019, according to the Ifo Institute in Munich. The Organisation for Economic Co-operation and Development (OECD) said in May 2021 that it sees the economic outlook brightening and global growth continuing to recover, bringing the world back to pre-pandemic levels by the end of 2022.
People want to go out and touch stuff and rub shoulders and fight for special offers at stores. You can see everyone wants to go out again.
Albrecht Ritschl, Professor of Economic History at the London School of Economics
Of course, caution is still called for. Any hint that the pandemic might not be under control is likely to send those same shoppers straight back home again. There are also fears of higher inflation with commodity prices rising and supply chain bottlenecks in some sectors. Are we in for a roller coaster ride? A look at how past pandemics have ended and the effects they had on economies around the world can give us some clues as to what to expect. From the perspective of an economic historian, a great deal of human history can be explained by the effects of pandemics on societies. The bubonic plague, commonly known as the Black Death, had a profound impact on Renaissance Italy, while attempts to stem the spread of typhoid in the late 19th and 20th centuries led to significant improvements in water quality in many regions. The cholera pandemic in France in the 1830s was followed by a period of economic revival as well as huge structural change.
Plagues have shaped the history of nations, sometimes causing societal upheavals and sometimes leading to rapid growth and innovation. It is argued that the plagues that Europe suffered over centuries were paradoxically the cause of long-lasting improvements in living standards and real wages. When looking for clues as to how Covid-19 will affect our societies and economies in the mid- to long-term, it pays not to look too far back in history. The 1918 flu pandemic – also known as the Spanish flu, as the Spanish press was the first to report it – is the best analogy, says Albrecht Ritschl, Professor of Economic History at the London School of Economics. It was the most severe of the three influenza pandemics of the 20th century, estimated to have caused 20–50 million deaths in 1918–1919. Although the aftermath of the First World War hampered recovery, there are lessons to be learned from how the disease was tackled and its impact on economies.
“The effects were big and differed by locality and policy response. Governments and municipalities tried to find a response. Likened to today, they varied a lot, from complete lockdown to almost complete denial,” says Ritschl. This means we can link economic responses to these policy responses. “In general, what we find is that the economic rebound was stronger, more pronounced, and more sustained in areas that had locked down early and hard,” Ritschl explains.
The historical evidence shows that although some places were revisited by the Spanish flu, good habits had been trained early on, so when a second lockdown became necessary, everybody knew what to do and the impact of repeat waves was not as strong. It’s not just the impact on the immediate vicinity that is evident.
In the case of the Spanish flu, we see how lockdowns and disruption have ripple effects across space because supply chains are affected. “Madrid goes into lockdown, economic activity is disrupted, this carries over into other provinces where the epidemic is not so strong but precautionary measures are being taken and supply chains are disrupted,” says Ritschl. “The strength of the economic fallout is pretty much like we see it today – output declines 5 or 10 percent on impact then grows back but falls again when the next wave strikes.”
Albrecht Ritschl is Professor of Economic History at the London School of Economics. He is an internationally renowned expert on debt crises, financial crises, historical business cycles, macroeconomic history, and monetary history. He was previously Professor of Economics at Humboldt University, Berlin, and at the University of Zurich, and was Associate Professor of Economics at Pompeu Fabra University. He is a Fellow at the Centre for Economic Policy Research (CEPR), the Centre for Economic Performance (CEP), and the independent research network, CESifo. He is also a member of the Scientific Advisory Board to the German Ministry of Economics and has published extensively on German economic history in the 20th century, with a focus on the 1930s.
The Spanish flu affected a third of the world’s population, making its way through Europe, the United States and Africa, into Australia and South America. When the fourth wave finally subsided, it was followed by a period of astonishing economic growth. Many historians have argued that the vigorous recovery in the United States in the 1920s – known as the Roaring Twenties – may have been a rebound effect to the Spanish flu. It is hard to say for sure, as other factors were at play. But some are arguing that we might see a similar effect in the coming years as our economies recover from Covid-19. There is, however, a major difference between the Spanish flu and Covid-19 in that our response to the epidemic is more intense and systematic.
“The difference between the historical evidence and what we see now is that back then there was not the same level of income support by the state. We have had this very strong public response in terms of income support, which means the macroeconomic response pattern to the crisis is different,” Ritschl says. “Generous government programs in many countries today seem to have led to a pile-up of savings. We see lots of saving by those who in 1918¬1919 would have been hardest hit by the crisis with unemployment and shutdown of businesses. Public policy has been geared to income smoothing – to ride out shock – with quite some success.”
The second major difference is the age profile. The Spanish flu hit people of prime working age – young adults age 22 to 35 – whereas the global death rate for Covid-19 is highest among the 60-plus age group. In that sense, the effect of the Spanish flu was worse for the economy, in particular the labor market, than Covid-19. In some senses, the current pandemic has seen a return to a pattern that used to be familiar throughout much of human history. “We have seen the return of pandemic-driven business cycles. This used to be normal economic life for tens of thousands of years. Since agriculture was invented, we’ve seen waves of pandemics ripping through human populations, dominating economic activity because they dominated mortality,” says Ritschl.
On the other hand, what we are seeing now is nothing more than a faint echo of previous crises. Whereas the mortality rates for Covid-19 are currently on average just over 2 percent according to Johns Hopkins University data, the bubonic plague killed 30 to 40 percent of those infected. So too did smallpox. The last pandemic of the plague was in the early 20th century in Southeast and South Asia and cost millions of lives. In terms of history, we are not that far from it. But now we have antibiotics and can stop these diseases in their tracks. The same is true of cholera, where public hygiene improvements mean we can stem the spread.
Nevertheless, what we have learned through Covid-19 is how disruptive a pandemic is economically. But we have also seen that the onset of modern economic growth probably had much more to do with the disappearance of epidemics than we realized, says Ritschl.
With vaccination programs underway around the globe and governments providing trillions in financial support, how will the recovery play out? A recent survey of CEOs worldwide carried out by PwC suggests that most are bullish about the economic outlook. The pandemic has unleashed energy and creativity, as leaders seek out enduring solutions to problems, argue the report’s authors. It will accelerate digital transformation, amplify disruptive forces and bring improvements in productivity – adding as much as 3.9 percent to the baseline figure, according to recent analysis from Goldman Sachs.
Of the CEOs surveyed by PwC, 76 percent said they believe the economy will improve during the next 12 months. In terms of optimism, this is a record – nearly 20 percentage points above than the previous high. In terms of revenue growth prospects for their own organizations, 36 percent said they were very confident for the next year, and 47 percent were very confident looking three years ahead.
Based on this, PwC estimates global growth could rise by 5 percent and return to its pre-pandemic size by the fourth quarter of 2021 or early 2022. Many experts agree, however, that the recovery will be uneven across sectors and countries. It is not only the discrepancies in access to immunization that make the difference. Different sectors face different paths out of the pandemic.
“It will be a mixed picture, with some businesses benefiting from a significant bounce back and others struggling with debt and continuing uncertainty. The aggregate figures might well be very positive but there will be plenty of bad news too and it’s important to recognize the difficulties of transitioning to a more normal state of economic activity,” says Diane Coyle, Bennett Professor of Public Policy at Cambridge University.
Diane Coyle is Bennett Professor of Public Policy at the University of Cambridge and Co-Director of the Bennett Institute. She heads research under the themes of progress and productivity. She was previously Professor of Economics at the University of Manchester and in 2018 was awarded a CBE for her contribution to the public understanding of economics. She has been a government adviser on economic policy, including throughout the Covid-19 pan demic, and is a Director of the Productivity Institute, a Fellow of the Office for National Statistics, and expert adviser to the National Infrastructure Commission. Her book, “Markets, State and People – Economics for Public Policy”, looks at how societies reach decisions on the use and allocation of economic resources.
For example, whereas technology companies are very optimistic, there is still a great deal of uncertainty in tourism. “We aren’t in the clear in terms of infection waves, nor will we be until every country is largely vaccinated. There will be a question of debt resolution, and how to achieve it as fairly as possible, supporting people who have been hammered by the pandemic while avoiding having the debt cloud loom for years,” Coyle explains. “This is corporate debts to governments and banks, but also personal debt. Consumers can’t spend if they have rent or mortgage arrears.”
As soon as you release brakes, the whole economy accelerates.
Albrecht Ritschl, Professor of Economic History at the London School of Economics
That is undoubtedly the case, but the signs are that the world is getting back on its feet. “Initially I thought the recovery would be L-shaped, that we would plunge into a recession and have a hard time getting out of it,” Ritschl explains. “The reason this didn’t happen is the very strong public intervention.” Because of the flood of public money, some thought the recovery would be swoosh-shaped, but Ritschl was skeptical. He predicted a W-shaped recovery, which has broadly turned out right.
“We’re coming out of the second trough now,” he says. “It seems the third wave has been broken by the vaccination campaign, but we still need to see what happens. We can cautiously assume that in Europe and North America we will be able to put it behind us. But until 70 to 80 percent of the world’s population have either had Covid-19 or been vaccinated, there will still be a lot of uncertainty.”
So, we can expect some zigzagging for a while. For example, airline bookings went through the roof when travel was allowed, then stagnated and there were lots of cancellations when people realized it wasn’t going to go so fast. But it won’t be like this forever. “I think it’s safe to say that as soon as travel restrictions are lifted, travel will normalize. People want to go out and touch stuff and rub shoulders and fight for special offers at stores. You can see everyone wants to go out again,” says Ritschl. “We had our first pint standing outside a pub – everyone had the greatest time.”
Some things, however, are likely to remain, such as using video conferencing much more than in the past as this creates savings and efficiencies. Goldman Sachs believes that it’s not just video conferencing that is here to stay. They also see gains in productivity being made through acceleration of e-commerce and believe empty office space could be repurposed in more profitable ways. The International Monetary Fund (IMF) said in April that it now expects the global economy to grow 6 percent in 2021, as economies adapt to new ways of doing things.
All upheaval has its costs. While the IMF agrees that the crisis has accelerated the transformative forces of digitalization and automation, it warns of the effects this could have on young and lower-skilled workers. The IMF is also worried about divergent recovery paths. Although swift policy action worldwide meant that a financial crisis was averted, they expect emerging markets and low-income countries to suffer greater scarring.
Against this backdrop, Coyle believes the priority for businesses now should be to ensure they have a clear corporate purpose, serving society not exploiting it, and treating their employees and customers well. “The appetite among the public not to return to ‘business as usual’ is tangible. If business as a whole doesn’t respond to the significant change in mood, there will be more regulatory intervention. The era of letting the ‘free market’ get on with things is drawing to a close,” she believes. But the recovery of confidence is of paramount importance. “Confidence is everything after an experience like the one we’ve all had since early 2020,” Coyle explains. “This is exactly why governments need to tread carefully and not withdraw fiscal support too quickly. The best way they will reduce the public debt burden is by ensuring their economies are growing again.”
Ritschl agrees but acknowledges how tricky it is to create confidence. “Confidence is as shy as a roe deer – the slightest sound and it disappears,” he says. “Yet as soon as there is quiet on the Covid-19 front, it comes out again. That’s what we are seeing in Britain right now. There is a strong rebound effect. People have the impression Covid-19 is over, they want to go out and shop, party, and invest.” In the long term, Ritschl believes people are expecting a return to normal – they don’t expect a lasting dent, they expect a full recovery. “The last time the sentiment indicators were this good was in the 1960s. As soon as the news is positive, confidence goes through the roof. As soon as you release brakes, the whole economy accelerates.”
Governments need to tread carefully and not withdraw fiscal support too quickly. The best way they will reduce the public debt burden is by ensuring their economies are growing again.
Diane Coyle, Bennett Professor of Public Policy at the University of Cambridge
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