The Covid-19 pandemic will have profound longer-term consequences. Certain industries will benefit, directly or indirectly, whereas others will suffer. The idea of thriving industries full of new opportunities and others struggling to survive reminds us of Schumpeter's creative destruction. Such a process can entail huge costs in the short run. Research shows the key role played by active labour market programmes. More broadly, economic policy not only needs to focus on the demand side but also, and increasingly, on the supply side so as to avoid that the pandemic acts as a lasting drag on growth.
The analysis of the economic consequences of the Covid-19 pandemic has hitherto predominantly focused on the near term. This is understandable. First, there was the severe decline in activity in March-April related to lockdown. As restrictions were progressively lifted in May-June, activity rebounded. From July onwards, the recovery has been losing momentum partly as distancing rules have remained in place due to the presence of the virus and more recently the tightening of restrictions in many countries to stop the exponential increase in new infections.
However, there will also be profound longer-term consequences, such as higher debt burdens for governments and many companies and the risk that many people who have lost their jobs or are in furlough schemes will remain unemployed for a considerable time. The supply side of the economy will undergo change as value chains are modified to increase their resilience to shocks. The demand side will change as well. Certain changes to spending habits during lockdown –such as increased use of e-commerce- may become permanent, the demand for office space will evolve as well as more people work from home, even in a post-pandemic world, etc. The long-term growth outlook of certain industries may look very different today compared to one year ago. In addition, in order to reach the climate objectives of the Paris agreement, many countries aim at reaching carbon neutrality by 2050. The pressure on many businesses is expected to remain high. "Historically, there is a lag between declining GDP growth and rising bankruptcies and unemployment, which tend to peak a year after the initial shock and remain high for another two years." 1 Moody's has calculated that, by February next year, the trailing 12-month global speculative-grade corporate default rate could reach a range of 9.7%- 13.3% if a similar path were to be followed as in previous cycles2. This creates a challenge for governments on how to allocate scarce budgetary resources. This point was emphasized recently by the UK Chancellor of the Exchequer, Rishi Sunak when presenting his Winter Economy Plan to Parliament: "We need to create new opportunities and allow the economy to move forward and that means supporting people to be in viable jobs which provide genuine security. As I've said throughout this crisis, I cannot save every business. I cannot save every job."3
The idea of thriving industries full of new opportunities and others struggling to survive reminds us of Schumpeter's creative destruction. "Creative destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones."4 Such a process can entail huge costs in the short run, with people losing their jobs and the destruction of corporate value. This could lead to a defensive policy reaction. In particular, governments that face elections could be tempted to prolong the special programmes that were put in place during the lockdown for an extended period in order to preserve jobs and businesses. In many countries, insolvencies are currently well below the level registered a year ago. However, research shows that job security provisions slow down the adjustment process of the economy, lowers productivity growth and hence GDP growth.5 This calls for a policy which, at a minimum, does not hamper structural adjustment but also finds ways to help those suffering from job displacement due to economic transformation.
The OECD has analysed this for 13 European countries over 1986-2008 and concluded that "the probability that workers who lose their job due to plant closure find a job within the next year is positively related to spending on active labour market programmes."6 Such programmes include spending on job-search assistance, training, public sector job creation and subsidised employment in the private sector.7 These policy questions are very much relevant at the current juncture. In the near term, Covid-19 is expected to cause a further increase in European unemployment and insolvencies. In the longer run, it will entail structural change in many industries with ensuing pressure on certain parts of the labour market. This means that economic policy will not only need to focus on the demand side but also, and increasingly, on the supply side so as to avoid that the pandemic acts as a lasting drag on growth.
Download The Full Ecoflash
BNP Paribas is regulated by the FSA for the conduct of its designated investment business in the UK and is a member of the London Stock Exchange. The information and opinions contained in this report have been obtained from public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy any securities or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, they are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. No BNP Paribas Group Company accepts any liability whatsoever for any direct or consequential loss arising from any use of material contained in this report. All estimates and opinions included in this report constitute our judgements as of the date of this report. BNP Paribas and their affiliates ("collectively "BNP Paribas") may make a market in, or may, as principal or agent, buy or sell securities of the issuers mentioned in this report or derivatives thereon. BNP Paribas may have a financial interest in the issuers mentioned in this report, including a long or short position in their securities, and or options, futures or other derivative instruments based thereon. BNP Paribas, including its officers and employees may serve or have served as an officer, director or in an advisory capacity for any issuer mentioned in this report. BNP Paribas may, from time to time, solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriter or lender) within the last 12 months for any issuer referred to in this report. BNP Paribas, may to the extent permitted by law, have acted upon or used the information contained herein, or the research or analysis on which it was based, before its publication. BNP Paribas may receive or intend to seek compensation for investment banking services in the next three months from an issuer mentioned in this report. Any issuer mentioned in this report may have been provided with sections of this report prior to its publication in order to verify its factual accuracy. This report was produced by a BNP Paribas Group Company. This report is for the use of intended recipients and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of BNP Paribas. By accepting this document you agree to be bound by the foregoing limitations. Analyst Certification Each analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the analyst's personal views about any and all of the issuers and securities named in this report, and (ii) no part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein. United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer, to US major institutional investors only. BNP Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. BNP Paribas Securities Corp. accepts responsibility for the content of a report prepared by another non-US affiliate only when distributed to US persons by BNP Paribas Securities Corp. United Kingdom: This report has been approved for publication in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas London Branch is regulated by the Financial Services Authority ("FSA") for the conduct of its designated investment business in the United Kingdom and is a member of the London Stock Exchange. This report is prepared for professional investors and is not intended for Private Customers in the United Kingdom as defined in FSA rules and should not be passed on to any such persons. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions permitted by regulation. BNP Paribas Securities (Japan) Limited, Tokyo Branch, a subsidiary of BNP Paribas, is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association. BNP Paribas Securities (Japan) Limited, Tokyo Branch accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch. Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch is regulated as a Licensed Bank by the Hong Kong Monetary Authority and is deemed as a Registered Institution by the Securities and Futures Commission for the conduct of Advising on Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance Transitional Arrangements. Singapore: This report is being distributed in Singapore by BNP Paribas Singapore Branch, a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Singapore is a licensed bank regulated by the Monetary Authority of Singapore is exempted from holding the required licenses to conduct regulated activities and provide financial advisory services under the Securities and Futures Act and the Financial Advisors Act. © BNP Paribas (2011). All rights reserved.
Recommended Content
Editors’ Picks
AUD/USD holds above 0.6500 in thin trading
The Australian Dollar managed to recover ground against its American rival after AUD/USD fell to 0.6484. The upbeat tone of Wall Street underpinned the Aussie despite broad US Dollar strength and tepid Australian data.
EUR/USD comfortable below 1.0800 lower lows at sight
The EUR/USD pair lost ground on Thursday and settled near a fresh March low of 1.0774. Strong US data and hawkish Fed speakers comments lead the way ahead of the release of the US PCE Price Index on Friday.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
Google starts indexing Bitcoin addresses
Bitcoin address data is live on Google search results after users realized on Thursday that the tech giant started indexing Bitcoin blockchain data. However, mixed reactions have followed the tech giant's reversed stance on the cryptocurrency.
A Hollywood ending for fourth quarter GDP
The latest revisions put Q4 GDP at 3.4%, the second fastest quarterly growth rate in two years. Much of the upside was attributable to stronger consumer spending, yet fresh profits data affirmed it was a good quarter for the bottom line as well with profits up by the most since the Q2-2022.