BNP Paribas' Markets 360 Research and Economics experts map out the major implications of covid-19 on business, consumer and government behaviour.
Covid-19 has had far reaching consequences across all aspects of society, some of which are already playing out and may have wide reaching and long term effects. Here, BNP Paribas' Markets 360 Research and Economics experts map out the major implications for medium and long term macro trends on business, consumer and government behaviour. Scroll down to see the effects we forecast across these 3 themes and click on the + symbol for more details.
BUSINESS BEHAVIOUR:
EXPEDITING EXISTING TRENDS
THE IMPACT ON PRODUCTION AND TRADE:
A DECREASE
A BOOST IN DIGITAL:
3 MAIN EFFECTS
Less demand for office space and thus rents for businesses
More investments in online platforms due to higher demand from consumers
Less demand for workers in the "bricks and mortar" retail sector. Reducing the bargaining power of workers in those sectors (pushing down on wages)
Boost the economy's supply capacity by increasing investment in productivity-enhancing IT
Improved price transparency and competition.
More online shopping due to lockdown that will most likely continue due to the habit developed in lockdown
Accelerated use of electronic payments/digital currencies
Fear of contagion through cash (although just a perception)
Creation of a centralised digital currency controlled by the central bank would allow for enhanced cyber risk management.
A BOOST IN DIGITAL:
3 MAIN EFFECTS
| Less demand for workers in the "bricks and mortar" retail sector. Reducing the bargaining power of workers in those sectors (pushing down on wages) |
| Boost the economy's supply capacity by increasing investment in productivity-enhancing IT |
| Improved price transparency and competition. |
| More online shopping due to lockdown that will most likely continue due to the habit developed in lockdown |
| Fear of contagion through cash (although just a perception) |
| Creation of a centralised digital currency controlled by the central bank would allow for enhanced cyber risk management. |
CONSUMER BEHAVIOUR:
A NEW NORMAL
STRUCTURALLY HIGHER SAVING
 | Uncertainty over out-of-pocket medical expenditures |
 | Increased credit risk with credit tightening by lenders |
 | High public debt with potential tax increases |
 | Unemployment and job insecurity |
Uncertainty over out-of-pocket
medical expenditures
Increased credit risk with
credit tightening by lenders
High public debt with
potential tax increases
Unemployment and
job insecurity
LESS LEISURE TRAVEL
& GREATER REMOTE WORKING
Decrease of
leisure travel
International travel restrictions to linger until vaccine is found
CAUSE more local travels
Lasting impact on supply due to potential airlines bankruptcy and/or if environmentally related cost increases push up prices.
Workers' effectiveness has been proved, shifting managers' scepticism
Higher investment in IT that is not likely to stop
Higher disposable income due to less transportation costs
Reduced frequency of office-based work makes living outside of cities more attractive, subject to improved broadband connectivity
Positive consequences on health/wellbeing
BECAUSE?
- New Healthy habits due to lockdown
- Increased attention paid to mental /physical health in general with firms increasing their benefits
- Fall in seasonal flu with new habit of washing hands
Positive consequences
on environment
International travel restrictions to linger until vaccine is found
CAUSE more local travels
Lasting impact on supply due to potential airlines bankruptcy and/or if environmentally related cost increases push up prices.
Reduced frequency of office-based work makes living outside of cities more attractive, subject to improved broadband connectivity
Positive consequences on health/wellbeing
BECAUSE?- New Healthy habits due to lockdown
- Increased attention paid to mental /physical health in general with firms increasing their benefits
- Fall in seasonal flu with new habit of washing hands
Positive consequences
on environment
GOVERNMENT BEHAVIOUR:
NO RETREAT FROM BIG STATE
4 REASONS THAT PUBLIC SPENDING IS UNLIKELY
TO RETURN TO PRE-CRISIS LEVELS
More investment in healthcare
Increase of hospital equipment
Higher public sector pay
Increase of employment in the healthcare sector
Increase of healthcare staff wages
More investments in digital infrastructure due to remote working
Greater labour market support
More generous statutory sick pay
Support for self-employed workers
Increased generosity and eligibility for unemployment benefits
4 REASONS THAT PUBLIC SPENDING IS UNLIKELY TO RETURN TO PRE-CRISIS LEVELS
| Increase of hospital equipment |
| Increase of employment in the healthcare sector |
| Increase of healthcare staff wages |
| More generous statutory sick pay |
| Support for self-employed workers |
| Increased generosity and eligibility for unemployment benefits |
GREATER ROLE OF THE STATE IN THE ECONOMY:
3 CHANNELS
Crisis measures become habit
As long as the crisis lasts, governments will be expected to take control
Reflections about the effectiveness of the response could change public expectations and demand regarding the role of the state
Post-crisis politics spurs intervention
Deglobalisation, and desire for self-sufficiency in some strategic sectors may lead to more Government intervention or support for certain industries
Bailouts lead to state ownership
State guarantees on struggling corporations' loans could, in the event of losses, leave those governments owning significant equity stakes in a number of companies
2 CONSEQUENCES OF SURGE
IN PUBLIC DEBT
Increased debt sustainability concerns
Lower
GDP growth
STATE INVOLVEMENT IN THE ECONOMY:
MITIGATED CONSEQUENCES
POSITIVE IMPLICATIONS
Better working conditions
Introduction of more rigorous environmental standards
Increased infrastructure investment that could boost long-term growth
NEGATIVE IMPLICATIONS
Greater government intervention would likely reduce competition, decrease efficiency and increase prices, either in the industry affected or in other industries that use their inputs
CHALLENGES FOR CENTRAL BANKS:
MITIGATED CONSEQUENCES
FISCAL DOMINANCE
Due to the impact on the large public debt overhang, central banks may be unwilling to raise interest rates if inflation starts to pick up, in turn jeapordising monetary policymakers credibility
PERMANENT EASING
It may be difficult to wean financial markets of the extraordinary policy support
LOSS OF INDEPENDENCE
Coordination between the monetary and fiscal authorities may blur the lines between institutions somewhat, potentially compromising independence
CONCLUSION:
THE MAIN MACROECONOMIC
IMPLICATIONS OF COVID-19
Lower productivity growth
Higher long-term unemployment
Exacerbation of post-financial crisis weak productivity and growth rates
Depreciation in the existing capital stock
Damage to the stock of human capital (loss of skills at all levels of society due to closed schools and training interruption)
Higher long-term unemployment
Deglobalisation, which reduces specialisation of production and competition and could create greater trade barriers between countries
Potential mitigating factors bring productivity gains
Technological innovation & investment in IT infrastructure
Creative destruction: disappearance of small, less productive firms pre-Covid-19
Technological innovation & investment in IT infrastructure
Creative destruction: disappearance of small, less productive firms pre-Covid-19
Structural changes to the economy may create challenges in quickly reabsorbing the large number of unemployed due to skills mismatch
Any remaining social distancing measures may limit unemployed workers' ability to seek out new jobs. Similarly, employers are likely to remain hesitant, at least initially, in their hiring decisions
Low confidence in the labour market and an increase in unemployment benefits might reduce incentives for some unemployed workers to look for new employment
LEADING TO
LOWER TREND GROWTH
Exacerbation of unfairness in income distribution within and across countries
More social tensions
More confrontational politics at the international level resulting in:
A re-shoring of production
A negative effect on trade and growth
LEADING TO
AMBIGUOUS IMPACT ON INFLATION (will depend on the balance between supply and demand shifts)
Factors pushing prices down
An increase in precautionary savings leads to a structural decrease in consumer demand
More frequent use of ecommerce tends to weigh on prices via increased price transparency and competitive pressures
Factors pushing prices up
Nationalisations and deglobalisation tend to reduce productivity and competition owing to lower specialisation and a less efficient allocation of resources, potentially putting upward pressure on prices
Similarly, higher bargaining power of workers in key sectors would likely bid up wages
Factors that could go either way
Lower productivity growth, all else equal boosts the price level, as it pushes up unit labour costs, but its side effects on activity are disinflationary
A similar argument holds true for upward shifts in the steady-state unemployment rate
2 OPPOSING SCENARIOS
"SLOWFLATION"
A subdued real growth might be combined with persistently low inflation, while declining inflation expectations would risk making such dynamics structurally entrenched over the long run
HIGHER INFLATION
It is also possible to see multiple consecutive years of above-target inflation instead, at levels that might be uncomfortable for central banks (e.g. 5% or more), even after taking into account recent undershoots
