After the pandemic

5 May 2020

Stephen King, Senior Economic Adviser, HSBC

The COVID-19 pandemic could do permanent damage to the global economy, dashing hopes for a quick recovery and encouraging governments to ‘onshore’ manufacturing in critical sectors.

The degree of economic and financial ‘scarring’ is difficult to estimate at this stage – most countries are still in the first phase of their fight against the pandemic, and it remains to be seen how long the various national lockdowns will continue. However, a return to the pre-COVID economic flightpath seems unlikely, even if recoveries prove to be U- or V-shaped. According to the International Monetary Fund, the cumulative global output loss by the end of 2021 could be equivalent in scale to the Japanese and German economies added together.

Governments the world over are attempting to build a bridge over the economic and financial crevasse created by COVID-19 to enable many businesses to pick up where they left off before lockdown. Those countries with deep and liquid domestic capital markets and with credible institutions are likely to be best placed to do this.

Some nations – mostly in the emerging world – face a particular struggle to recover. For instance, the level of economic activity in Brazil and India may end up more than 4 per cent lower by 2021 relative to HSBC Global Research’s end-2019 forecasts, double the shortfall we expect to see in countries like the UK and China.

Bridge-building will be more effective within nations than across nations. As China is discovering, ending a local lockdown does not imply that a country can re-engage with a prosperous and dynamic world economy: whatever policymakers achieve domestically, they cannot fully offset the impact on a country’s exports (and, hence, its overall GDP) of collapsing demand elsewhere. We may see more ‘social distancing’ between countries as they emerge from lockdown at different times.

The cost of bridge-building will be most visible in the form of much higher levels of government debt, akin to increases more typically seen during wartime. At this stage, the consequences of these hefty debt increases are unclear: the better the bridge, the bigger the economic rebound and the more digestible is the debt. Wartime experience suggests, however, that significant scarring could lead to either higher inflation, more austerity or, for countries in desperate financial circumstances, capital controls or default.

Technology could potentially come to the rescue. Just as the post-war technology boom boosted US economic recovery in the 1950s, the war against COVID-19 will also lead to significant technological changes that, in time, will trigger major shifts in how societies operate. Not all of these shifts, however, may be positive for all.

One obvious change is the likely proliferation of home working, an outcome that may significantly reduce time spent on travelling to places of work. In turn, this might lead to a reduction in office space and an increased supply of property for residential purposes. A second, related, change is a likely proliferation of ‘virtual’ meetings and ‘virtual’ conferences: audio-visual quality will doubtless improve at a rapid rate in coming quarters and, as it does so, the need for physical meetings will decline. This will both reduce costs for companies and limit the business risk associated with heightened restrictions on the cross-border movement of people. In both cases, there is likely to be a significant and lasting climate ‘dividend’.

A third change – already happening before the COVID-19 lockdowns – is the use of technology to shorten global supply chains and encourage ‘reshoring’, suggesting a growing income gap between already-industrialised economies and those in danger of being left behind.

This process may be accentuated through the economic consequences of COVID-19. Governments may increase their preparedness against other rare but high-impact risks, placing a much wider range of economic activities under the ‘strategic industries’ banner. Global supply chains are likely to be attenuated, with home bias becoming a much bigger influence, marking a part-reversal of the efficiencies gained over the past half-century.

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Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Stephen King.

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