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Full recovery from Covid-19 economic crisis in 2023

Patrick Artus
Head Economist at Natixis

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 
1The Region­al Com­pre­hen­sive Eco­nom­ic Part­ner­ship (RCEP) is a free-trade agree­ment between the between Aus­tralia, Brunei, Cam­bo­dia, Chi­na, Indone­sia, Japan, Laos, Malaysia, Myan­mar, New Zealand, the Philip­pines, Sin­ga­pore, South Korea, Thai­land, and Viet­nam.



Patrick Artus

Head Economist at Natixis

A graduate of Ecole Polytechnique, Ecole Nationale de la Statistique et de l'Administration Economique and the Institut d'Etudes Politiques de Paris, Patrick Artus was Director of Research and Studies at NATIXIS until 2020, then Chief Economist and Member of the Executive Committee. He combines his teaching duties with his research work and is associated with various economic journals and associations. Today Patrick Artus is on Boards of Directors at Total and IPSOS as a Director and Economic Advisor to Natixis.

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