The main macroeconomic implications of Covid-19 - BNP Paribas CIB
 
Thursday 17 September 2020

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

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

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 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



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