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.
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