Will there be a “post-covid” economy?

We are all won­der­ing what the pan­dem­ic will change in the long term. Will the Cov­id-19 health crisis leave a long-last­ing trace in our eco­nom­ic sys­tem? Its a ques­tion we still can­not answer with cer­tainty because it is dif­fi­cult to assess what struc­tur­al rup­tures will remain after the crisis is over. How­ever, we can see at least six pos­sible dis­rup­tions in the fields of the labour mar­ket, industry, energy trans­ition and digit­al­isa­tion, as well as mon­et­ary and fisc­al policies. At this stage, these are only trends and weak sig­nals, so only time will tell if they come to pass.

1. Labour mar­ket: few­er applic­ants and high­er wages?

Since the late 1990s, OECD coun­tries have exper­i­enced a dis­tor­tion of the income dis­tri­bu­tion to the det­ri­ment of employ­ees. There has been a decline in employ­ee bar­gain­ing power with com­pan­ies they work for (Fig­ure 2A). How­ever, since the begin­ning of the health crisis, there has been a decline in par­ti­cip­a­tion rate, i.e. the pro­por­tion of work­ing-age people enter­ing the labour mar­ket has fallen (Fig­ure 2B). If this trend were to con­tin­ue or increase, the rising ten­sion on the labour mar­ket would be favour­able to employ­ees and wages would rise, thus gen­er­at­ing some inflation.

2. Will indus­tries recover?

For more than twenty years, the amount of pro­duc­tion by advanced eco­nom­ies has been on the decline. How­ever, since the begin­ning of the Cov­id crisis, we have seen a drop in the con­sump­tion of ser­vices due to health restric­tions (res­taur­ants, leis­ure activ­it­ies, etc) accom­pan­ied by a sharp rise in the con­sump­tion of goods. This is linked to the devel­op­ment of online com­merce and dif­fer­ent needs or desires that emerged dur­ing the lock­downs (garden­ing, dec­or­a­tion, cre­at­ive leis­ure activ­it­ies, etc.). In the face of this, will industry recov­ery (graph 3B)? Yes, there is reas­on to believe so thanks to the new needs linked to work­ing from home (elec­tron­ics, fur­niture), the need for equip­ment for renew­able ener­gies (wind tur­bines, elec­tro­lys­ers for hydro­gen) and because of gov­ern­ment recov­ery plans and invest­ments in infra­struc­ture. Will this cre­ate jobs in OECD coun­tries? It could be the case, if some pro­duc­tion is relo­cated for reas­ons of sov­er­eignty or to sim­pli­fy the sup­ply chain (medi­cines, high-end tex­tiles) this would increase the need for skilled workers.

3. What will be the con­sequences of accel­er­a­tion in the energy transition?

The pan­dem­ic has con­trib­uted to accel­er­at­ing the energy trans­ition, but it is not yet clear what the con­sequences of a rap­id trans­ition to net zero CO₂ emis­sions in 2050 would be. Will the jobs des­troyed (car industry, oil sec­tor) be replaced by oth­ers (thermal insu­la­tion, wind farms)? Will renew­able energy equip­ment be man­u­fac­tured in OECD coun­tries or impor­ted? For the moment, the share of the these products man­u­fac­tured in France is very low. The second option – import – would lead to a decrease in added value for these eco­nom­ies. And finally, what effect will the energy trans­ition have on the price of energy? The inter­mit­tency of renew­able energy pro­duc­tion will likely mean a sharp increase in price because of the need for elec­tri­city storage.

4. Is digit­al­isa­tion pos­it­ive for the economy?

Noth­ing is less cer­tain. Digit­al­isa­tion of the eco­nomy has accel­er­ated since the begin­ning of the pan­dem­ic (e‑commerce, deliv­er­ies). How­ever, while digit­al tech­no­logy cre­ates highly skilled jobs in the design of ser­vices (com­puter developers, engin­eers), it also cre­ates a large num­ber of unskilled jobs (deliv­ery per­son­nel, pack­ers). This polar­isa­tion res­ults in strong income inequal­it­ies. Moreover, it is not at all cer­tain that the digit­al eco­nomy increases pro­ductiv­ity. On the con­trary, it has been observed over the past 20 years that the increase in invest­ment in new tech­no­lo­gies has coin­cided with a slow­down in pro­ductiv­ity (Fig­ure 5B).

5. Can cent­ral banks change their policies?

The “whatever the cost” approach to sav­ing com­pan­ies and jobs by the gov­ern­ment has required the inter­ven­tion of cent­ral bankers. In doing so, they have mon­et­ised state debt by greatly increas­ing the volume of money in cir­cu­la­tion i.e. print­ing bank­notes. Con­trary to wide­spread belief, gov­ern­ments will not have to repay a large part of the debts they have con­trac­ted, as these are now recor­ded as liab­il­it­ies of the European Cent­ral Bank (ECB) and the Fed­er­al Reserve, and it is dif­fi­cult to see why this option should change (Fig­ure 6B). On the oth­er hand, if mon­et­ary policy has made it pos­sible to main­tain the solvency of states, it has strong reper­cus­sions on asset prices. The avail­ab­il­ity of liquid­ity res­ults in high­er asset prices (real estate and cor­por­ate val­ues) which increase wealth inequal­ity (Graph 6B). On the oth­er hand, it is not clear wheth­er a rise in interest rates would lead to a pub­lic debt crisis.

6. Can states fore­go pub­lic defi­cits?

The health crisis has required huge mobil­isa­tion of liquid­ity and gov­ern­ments have really pushed the usu­al lim­its of defi­cits and pub­lic debt (Graph 6E). Pub­lic opin­ion has become all the more accus­tomed to these increases because of the grow­ing num­ber of needs: energy trans­ition, relo­ca­tion, health, research, young people, the fight against poverty. In France, for example, there are sev­er­al announce­ments per week that require an increase in pub­lic debt (invest­ments in Mar­seille, reim­burse­ment of psy­cho­logy con­sulta­tions, com­mit­ment income for young people). Will states be able to return to more sobri­ety? We don’t know, but we do know that if they don’t, the pres­sure on cent­ral banks to main­tain their accom­mod­at­ing policies will be considerable.