Full recovery from Covid-19 economic crisis in 2023

What are the conse­quences of the cur­rent reces­sion that we can expect to see ?

It all depends on the indus­tries which have been impac­ted most retur­ning to a nor­mal level of acti­vi­ty. This includes sec­tors like tou­rism, hos­pi­ta­li­ty, culture, cor­po­rate real estate, phy­si­cal dis­tri­bu­tion, events, and air tra­vel. These indus­tries account for 25% of the eco­no­my on ave­rage, and 1 in 4 jobs in coun­tries such as Spain (less so in others, like Ger­ma­ny). In 2020, France’s GDP went down by 8% and Germany’s by 5%. The three percent gap is essen­tial­ly due to tou­rism rather than dif­fe­rences in mana­ge­ment of the pan­de­mic – which was actual­ly very similar. 

Will these indus­tries return to their pre-pan­de­mic levels ? We alrea­dy know that some, such as cor­po­rate real estate, will not because a pro­por­tion of people will conti­nue to work from home. Also affec­ted will be phy­si­cal dis­tri­bu­tion because e‑commerce has increa­sed its mar­ket share (from 10% to 15% in France, for ins­tance). And, pos­si­bly, long-haul cor­po­rate air tra­vel, which can be par­tial­ly repla­ced by video confe­rences, as shown during the pandemic. 

But other sec­tors will return to nor­mal. It has alrea­dy hap­pe­ned in Chi­na, where the virus has been under control since April 2020. There, e‑commerce shot up from 20% to 30%, and people work from home a lit­tle more (15%). Other sec­tors have retur­ned to their nor­mal level of activity. 

What are the poten­tial sce­na­rios for coun­tries that are still under restrictions ?

Even if the vac­cine roll-out contri­butes to impro­ving the situa­tion and there aren’t too many pro­blems from the dif­ferent strains, the first half of 2021 will be high­ly dis­rup­ted in the US and Europe. Then, things will pick back up in the third quar­ter, with 4% to 4.5% growth for the year. By mid-2022, we can hope to return to levels of pro­duc­tion seen in the fourth quar­ter of 2019, but that will not be enough to prevent unde­rem­ploy­ment or ban­krupt­cies. For that, we must reach the level we would have had without the pan­de­mic and that will not hap­pen before 2023. At the end of 2022, in France, the pro­duc­tion defi­cit will still be 3.5% lower than poten­tial pro­duc­tion, which means that unem­ploy­ment will be up by an extra 2.5 points. 

The reco­ve­ry will vary from one eco­no­my to the next. Some indus­tries have bene­fi­ted from the pan­de­mic, inclu­ding phar­ma­ceu­ti­cals, secu­ri­ty and tech­no­lo­gy. Coun­tries that are orien­ted around these sec­tors, like the Nor­dics and the US, have an advan­tage. Indus­try is doing well, but ser­vices are suffering.

Is govern­ment assis­tance lin­ked to this recovery ?

The govern­ment needs to main­tain their no-mat­ter-the-cost approach to ensure busi­nesses can sur­vive because we do not know which of them will disap­pear. It is far too ear­ly to aban­don cer­tain busi­nesses. If we knew, we wouldn’t need to sub­si­dise them. Their sur­vi­val is cru­cial, because it is lin­ked to eco­no­mic acti­vi­ty retur­ning to nor­mal. If that doesn’t hap­pen, there will be many ban­krupt­cies (which have been his­to­ri­cal­ly low thanks to govern­ment assis­tance – 35,000 in 2020 vs. 50,000 in 2019 in France) and poten­tial­ly 1 in 4 wor­kers will have to retrain, due to a lack of jobs in impac­ted indus­tries. But I don’t believe that will hap­pen so long as we have good public assis­tance poli­cies and aim for medium-term reco­ve­ry, impac­ted sec­tors inclu­ded. Chi­na has seen a full reco­ve­ry for the hos­pi­ta­li­ty and avia­tion sectors. 

One in four employees will be affec­ted by re-trai­ning due to a lack of oppor­tu­ni­ties in the affec­ted sectors.

How would you cha­rac­te­rise the cur­rent recession ?

It is extre­me­ly hete­ro­ge­neous. First­ly, it only affects cer­tain sec­tors, spe­ci­fi­cal­ly small and medium-sized enter­prises (SMEs). This can be seen in the higher levels of cre­dit in 2020 : +13% ove­rall, +4% for large cor­po­ra­tions, but +20% for SMEs. As such, the reces­sion is espe­cial­ly hard on SMEs in sec­tors that are expe­rien­cing great dif­fi­cul­ty or that are on standby.

Second­ly, not all coun­tries are affec­ted. In Asia, the eco­no­my has been back to nor­mal levels since April 2020, having reo­pe­ned in the second quar­ter thanks to strict, intru­sive and some­times bru­tal mea­sures. Fif­teen of these coun­tries, which form the Regio­nal Com­pre­hen­sive Eco­no­mic Part­ner­ship (RCEP)¹ zone, were able to era­di­cate the virus. Their pro­jec­ted growth is 6.5% in 2021. By the end of 2020, RCEP alrea­dy had 3% higher GDP than at the end of 2019. 

As a side note, it is wide­ly belie­ved that Euro­peans and Ame­ri­cans would never have accep­ted the mea­sures imple­men­ted in Asian coun­tries. With the excep­tion of Fin­land, which had very strict res­tric­tions, there is a consen­sus in Europe on this topic. Ex post, having paid the price with their free­dom, Asian coun­tries are one year ahead in the pan­de­mic reco­ve­ry, which is very impres­sive. On this note, there is cur­rent­ly a debate in Ger­ma­ny around the best stra­te­gy for­ward. They are thin­king of conti­nuing the lock­down until they reach a very small num­ber of cases to get the epi­de­mic under control, and then iso­la­ting new cases as has been done in Asia.

Third­ly, this finan­cial cri­sis is hete­ro­ge­neous in that it affects some people more and others, less. Young people and those with short-term contracts have had great dif­fi­cul­ties, whe­reas wor­kers with per­ma­nent contracts do not have to wor­ry. Fourth­ly, it increases wealth inequa­li­ties. Mone­ta­ry poli­cy is lea­ding to higher liqui­di­ty, which creates asset bubbles for the value of com­pa­nies and real estate.

Is this dangerous ?

No one real­ly needs to wor­ry about the Bit­coin bubble and Elon Musk’s astoun­ding deci­sion to chan­nel a huge chunk of Tes­la’s cor­po­rate cash into the cryp­to cur­ren­cy. For com­pa­nies, it is not such a big deal either. Howe­ver, for real estate, it is a concern. The Ame­ri­can real estate mar­ket grew by 11% in 2020 while the pan­de­mic raged. A signi­fi­cant increase should be expec­ted in the coming months in Europe. It’s a concern because we saw the conse­quences of such a growth in 2008 : real estate bubbles set off ban­king crises when they burst ; as long as they exist, they create serious pro­blems for access to housing.

How can we limit the impacts of mone­ta­ry expansion ?

We could imple­ment eco­no­mic poli­cy mea­sures, like a short-term capi­tal gains tax to dis­cou­rage spe­cu­la­tion, as Cana­da has done, or res­trict access to mort­gages. But the poli­ti­cal issue remains : how will this be per­cei­ved ? Should mone­ta­ry poli­cy make the rich richer ? We can pro­vide sup­port to low-income ear­ners, as pro­po­sed by Joe Biden, to make the wage gap more accep­table, but that will not reme­dy wealth inequalities. 

How can Europe capi­ta­lise on its eco­no­mic recovery ?

If you pro­ject to ten years out, 4% growth is expec­ted in Asia, 2% in the USA and 1% in Europe, so there is enor­mous incen­tive to shift resources to Asia. This com­bines two key advan­tages : strong demand and low pro­duc­tion costs. Consi­de­ring that value chains will become more regio­nal in nature, pro­duc­tion should shift to consu­mer mar­kets. It’s the end of the Ger­man mer­can­ti­list export model.

Many in Europe think that this regio­na­li­sa­tion is good news, but that’s not true – capi­tal will go where it will have the best returns, even if some sub­si­di­sed relo­ca­tions will hap­pen for stra­te­gic rea­sons (e.g., medi­ca­tions). I don’t believe in relo­ca­ting or trying to catch up with Chi­na, which has sped ahead in solar power and first-gene­ra­tion bat­te­ries. We have good invest­ment poli­cy in Europe, orien­ted towards second-gene­ra­tion bat­te­ries, wind power and hydro­gen ener­gy, which are like­ly to be the future’s key ener­gy mar­kets. The best stra­te­gy is to invest now in the sec­tors of tomor­row, in order to have a head start on other countries.

Interview by Clément Boulle