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What are the prospects for a full economic recovery in 2021?
Covid-19 impact will be long-lasting and recovery will be staggered across different countries and sectors
29 Dec 2020 | Esty Dwek

Covid-19 has been one of the biggest public health crises in more than a century. Unlike in other economic crises, the scale of closures across society, from shops, schools and restaurants to factories and offices, has been unprecedented, while travel has been restricted in ways that we have never previously experienced. With news of a vaccine and countries and regions going in and out of lockdowns, it does beg the question of what Covid-19’s long-term impact will be on economies, markets and ESG.

From where we stand at present, the evidence suggests the recovery from Covid-19 will be staggered across different regions and countries, and that it will take us time to get back to where we were before the pandemic. This has been shown in China, where the economy had a quick initial recovery but is still taking time to get back to pre-crisis levels.

Recovery will also likely be uneven between sectors, with hard-hit sectors like airlines, travel and entertainment unlikely for now to keep up with “pandemic winners” such as healthcare and technology. Even as economies properly reopen, people will likely be reluctant to go back to offices, shops and movie theatres in the same numbers – which will have longer-term, secular changes to the economy.

Thus, one of the important lessons for businesses from the pandemic going forward is about the importance of preparedness and having the ability to adapt quickly to a change in circumstances. Those that had business continuity plans in place for natural disasters or terrorism incidents, for instance, applied them with great success to the coronavirus.

Equally, some businesses skillfully took the global pandemic as an impetus to revamp their business models, such as shifting their services online, or change the way they work by introducing more flexibility or even moving completely to remote working.

There is potential though for a very fundamental rethink, not only about business continuity, but about the way we do business – what kind of relationship we have between employer and employee, or between a business and its customers. Businesses are also going to have to rethink their practices and models, and their operating leverage.

Companies, for instance, are likely to become more conservative in the way they manage their balance sheet. There may also be more emphasis on healthcare and worker benefits and increasing taxation for higher net worth individuals – a rebalancing between labour and capital. Structural reform will be needed, and it is likely that shareholders will have to pay for it.

Government intervention and globalization

The stimulus measures rolled out by central banks and governments have also been unprecedented. As we saw in the decade following the global financial crisis, it has been very difficult to pull back stimulus; and given the monetary and fiscal response to coronavirus has dwarfed that which was seen in 2008, it is almost certain that government intervention in the economy is going to continue.

The emergence of the global economy from Covid-19 will not be like the period experienced after World War Two, which was marked by decades of growth in the labour force and in productivity. After this shock, neither is likely to happen. For the first time in history, we’ll have massive budget deficits that won’t go away – and that’s going to stress government resources in ways we’ve never seen before.

Globalization has also become a big question mark. At the beginning of the pandemic, dependence on China was considered a risk. In fact, the rest of the world ended up facing greater challenges. This, however, does not mean that strategic industries will not be brought back on shore – healthcare for example, probably defence as well. In Europe, it could be euro zone-wide – one aspect of the crisis has been to bring Europe closer together.

Covid-19 to take ESG beyond just climate change

The coronavirus pandemic has shone a spotlight on environmental, social and governance (ESG) issues, as the upheaval gave investors and the public alike a different perspective on how different companies were able to navigate the difficulties it posed. These concerns centre around the “G” of ESG, which will likely come out even more as companies continue to deal with the crisis. Environmental issues, meanwhile, will likely take a backseat in the short term as companies look to get back on their feet.

That does not mean concern for the environment will go away, of course. In the current crisis, a lot of ESG funds have held up quite well. They have proven to be a bit more defensive. In the long run, this crisis should elevate ESG. Maybe one of the consequences is that we get a healthier, more balanced view, particularly in the United States. So ESG is no longer just about climate, it’s about “E”, “S” and “G”.

Esty Dwek is head of global market strategy at Natixis Investment Managers Solutions

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