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