Accuracy Talks Straight #1 – Economic point of view

2021: an eristic year! | 4-minute read

Hervé Goulletquer
Senior economic adviser, Accuracy

Gillian Tett, one of the chief editors at the Financial Times, commented earlier this year that people in New York found it harder to part with their Christmas trees after the holiday period. Has the COVID crisis really changed our relationship with time and space? Private and professional life is intertwining, just as the line between home and office is blurring. Are our points of reference changing? Will we find them again when the pandemic has finally been put behind us?

We should keep in mind this warning about possible behavioural changes taking place when we wonder what 2021 has in store for us. Of course, we should start this forward-looking exercise by taking a look at the macroeconomic forecasts. They bring hope. The IMF has revised its figures for global growth upwards: +0.3 points to 5.5%, after -3.5% in 2020. At the IMF, they seem to think that the loss of economic activity generated by the health crisis is going to be more than compensated! Can we say then that everything is going back to normal, back to business as usual?

No. And we must consider other approaches to better understand the upcoming period.  

Let’s stay on macroeconomic territory for a while and note a few points: 

1. Recovery remains highly conditional upon developments on the health front. If the decline in the pandemic is delayed even by only a few months, the first half of the year will be lost to the recovery; performance for the whole year will clearly be affected. Taking the example of the eurozone, we can see that growth fell by over 7% in 2020. Under the commonly accepted idea that there will be a net decline in the pandemic from spring, the economic rebound could reach between 4% and 4.5% this year. Delay the decline by just three months and a third of this growth would be cut!

2. The big growth figures that we’re talking about shouldn’t mask the point that it will take time to get back on the track that was expected before the pandemic. According to the World Bank, by 2022 there will be a shortfall of four trillion dollars in wealth creation. This is more or less the size of the German economy and is not something to be sniffed at. Should we fear being ‘condemned’ to another episode of slowdown in potential growth after a major crisis, even if its origin is neither economic nor financial? To make sure that we don’t have to respond in the affirmative to these questions, committing to a recovery policy that prioritises supply over demand seems essential. Will this be the case?

We must also ask ourselves what lies behind these figures, which retrace the developments of very broad economic aggregates. In difficult times such as these, we often see, behind the averages, an increase in standard deviations. This means that certain households, certain businesses and certain countries are suffering more. The least qualified have been the most affected by the downturn in the labour market. How much time will it take for any improvement in employment to reach them? It’s also clear that prospects are not the same for a small business in the tourism sector as for another in the digital sector with global activities. Finally, a country heavily involved in manufacturing industries and with significant room for manoeuvre in terms of supportive policies (Germany, for example) is in a better position than another specialised in labour-intensive services and constrained by long-deteriorating public accounts. We must wonder about the economic, social and political implications of this divergence. Are we heading towards less growth (convoy theory?), more inequality and ultimately less harmonious societies – both internally and with others – which are therefore more difficult to manage? If this is the case, what measures should be taken to counter these risks?

We should also consider the changes in behaviour brought about by the crisis:

1. A whole series of innovations already in progress are accelerating, whether it be digitalisation, distance selling, remote working, telemedicine, artificial intelligence or biotech.  Certain sectors (transport services and upstream industrial branches, for example) will have to reinvent themselves.

2. Households and companies may change their trade-off between spending and saving: more caution, just in case, and so more savings? The economic and financial implications of such a change would be significant, namely a declining investment trend and interest rates coming to rest once again one notch lower than before.

3. Those responsible for public policy are therefore facing a complicated environment to grasp in all respects: they must manage the past (a heavy and high public debt) and prepare for the future (facilitate the structural changes towards the energy and environmental transition and also towards digitalisation). But what will the consequences ultimately be for productivity and growth profiles or the financial performance of companies? How much time will it take for all this to be visible, if it happens?

When we can’t see tomorrow very well, it’s only human to hang on to what we know – yesterday. But this ‘back to basics’ only makes sense as a springboard to dive into the new opportunities provided by a changing world: after a crisis, it’s often out with the old and in with the new. Let’s keep our Christmas trees longer than usual if it makes us feel better, but let’s make sure to keep an eye open for the weak signals of a changing world. That is how we progress!

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