Economists do not agree on what will happen to economic growth globally once the Covid-19 pandemic ends. What seems clear is that it matters when it ends.
Though some early on might have believed a recession is not inevitable, that seems a dashed hope.
When asked about the potential impacts on revenue and, or, profit this year, 58 percent of chief financial officers surveyed by PwC in the first week of March 2020 expect a decrease, while 40 percent say it’s too difficult to assess at the moment.
A majority of respondents (90 percent) believe their business would return to normal within three months if the coronavirus were to end immediately.
Global gross domestic product could shrink from $2 trillion to $9 trillion from the Covid-19 pandemic, roughly one percent to two percent from pre-pandemic levels, depending on the severity of the pandemic, a study by Brookings indicates. Some believe economic growth has a chance to grow in the second half of the year.
Some believe that might be optimistic. Other estimates suggest seven percent drop in U.S. GDP in 2020 alone, representing a recession as bad or worse than that 2007/9 economic contraction. But at least one study of the economic impact of the global influenza pandemic of 1918 suggests growth might not suffer for very long, and could in fact see economic growth accelerate after a couple of years.
“A recession is now all but certain, according to a Wall Street Journal survey of 34 economists, which projects a downturn that would last months at least, and would in some ways rival—and possibly even surpass—the severity of the 2007-09 slump,” according to the Wall Street Journal.
Much could eventually hinge on how long “social distancing” is kept in place. A couple of weeks will not be structurally damaging. But months of such policies will cause significant economic distress, high unemployment and many smaller business bankruptcies.
A study by the United Nations Conference on Trade and Development looking at the impact of the 2008 great recession found that global gross domestic product growth took about four years to return to 2007 levels.
If the aftermath of the Covid-19 pandemic has economic effects similar to the sharp global recession of 2008, it might well take seven to eight years for jobs, gross domestic product or household net worth to return to 2007 levels.
Jobs did not recover to the 2007 level until seven years later, in 2014. GDP per person did not recover to 2007 levels until 2013. Household net worth took about eight years to recover to 2007 levels.
Looking only at gross domestic product, the 2008 recession caused a dip in gross domestic product that recovered to 2007 levels after two years.
U.S. unemployment did not return to 2007 levels for a decade.
“The Great Recession created an unusually large and long-lasting gap between actual and potential GDP,” says the Congressional Budget Office. The gap did not close until 2017, a decade later, according to CBO’s August 2018 Economic and Budget Outlook.
Nobody yet can predict whether long-lasting changes in business and consumer behavior will be permanent after the Covid pandemic passes. Supply chains already were changing, in advance of the pandemic, for example, so that trend virtually certainly will remain intact.
For suppliers in the connectivity business, some speculate there could be longer-term moves by businesses in the direction of remote work that are permanent. It might be easy to predict that more personal and business activities will be conducted virtually, online and remotely, for example. That might be mildly helpful for connectivity providers, though the trend has been in place for many decades.
Related trends such as use of videoconferencing, telemedicine and cocooning might arguably also remain bigger changes that have connectivity provider implications. More work-from-home might get a boost as well.
Some believe there will be a permanent reduction in business travel, for example.
But consumer behavior in a crisis often does not actually become permanent. How many of us actually believe the present shift to buying of “essentials” remains intact after the crisis passes? Who doubts that consumption of “non-essential” or aspirational products will not return to past levels?
All that happens against a productivity and economic growth background that might explain behavior more than episodic recessions or expansions, though. The U.S. Bureau of Labor Statistics, in 2014, predicted that “the 2007–2009 recession and other factors will have an adverse effect on the U.S. economic outlook through 2022.
One poll of consumer spending suggests spending levels remained depressed after the 2008 recession for at least seven years, never reaching pre-recession levels during that period.
In other words, the impact on growth, jobs and spending from 2008 would last 13 years.
“The aging of the population, lack of business investment during the recession, and high long-term unemployment are expected to place constraints on potential GDP growth, BLS said in 2014. “As such, U.S. GDP is not expected to attain the higher growth rates that are typically seen following recessions.”
A “new normal” of slower growth was predicted. Those predictions turned out to be wrong on the low side.
That thinking is predicated on changes in consumer behavior some say remained permanently altered in the wake of the great recession of 2008. Certainly consumer spending appeared more restrained than many expected six years after the recession.
Some argue that changed consumer buying preferences in the immediate wake of the 2008 global recession would become more-established behavior longer term. One such trend was consumer willingness to experiment with lower-priced brands.
Still, it is hard to separate other secular trends from the specific changes wrought by the disruption. Customers in 2020 are more likely to buy organic products or fair-trade goods, for example. But those trends were in place even before the 2008 global recession, and tends to run counter to the “lower-priced goods” trend some say that recession introduced.
But a decade after 2008, some would note that a search for value remains intact. What is not clear is “why?” A counter argument could be made that the general experience with online shopping has accustomed consumers to lower prices, generally, and that this behavior is not a lasting result of the 2008 recession.
Also, millennials facing job market toughness might have developed receptiveness for value for income-related reasons.
Some changes might have happened with savings rates, though that also might be explained, in part, by millennial job issues.
The point is that it is very hazardous to predict how consumer or business behavior might change over a 10-year period, based on reaction to a recession or biological shock. We could well see a several-year period where behavior seemingly has altered, only to see the effects disappear after that.
It seems safe to say that larger trends such as the application of cloud computing, artificial intelligence, internet of things and edge computing will continue. Some might call that “digital transformation.”
What remains to be seen is whether shifts to remote work, work from home and some other trends become permanent features of business behavior at much-higher levels than was the base case before the Covid pandemic.
History suggests we might not know for a half decade or so.
