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