Credit Suisse Research Institute publishes new study looking at the long-term implications of COVID-19.
The report entitled ‘What will last? The long-term implications of COVID-19’ was published today and finds that rather than radically changing the world as we know it, COVID-19 has accelerated existing trends. The digitalization of everyday life, the trend toward more flexible work arrangements, the deceleration of globalization, the weakening of multilateralism, the expansion of the state or the vulnerability of cities – all of these developments were already under way prior to the outbreak of the virus.
In terms of economic developments, the report notes inflation tail risks will remain, a slowdown of globalization, increased decentralization away from urban areas and a disproportionate impact of the pandemic on disadvantaged groups.
Inflation tail risks
- The benign inflation regime of past decades will persist in the medium term, but deflation and inflation tail risks have grown.
- The COVID-19 crisis is a sharper and more synchronized downturn than the Great
- Depression. Yet it will most likely not last nearly as long thanks to better policy responses.
- The measures taken should be sufficient to mitigate second-round effects that could weigh heavily on future growth, but risks are to the downside.
- The report authors see fears of rising inflation as exaggerated and are more concerned that the post-COVID-19 world will be one of sluggish growth and barely visible inflation.
- That said, a structural shift toward higher inflation, either due to demographic or political factors, is tail risk.
Nearshoring
- Globalization will not reverse, but slow further, with more emphasis on regional diversification, nearshoring of production and resilience rather than cost efficiency.
- The trend toward regionalization will open up opportunities for lower-cost production countries that are closer to the main consumer centers (USA, Europe, China, and Japan).
Decentralization
- By opening up alternatives for workers to exercise their professions at a greater distance from the city, remote work is fostering a decentralization of economic activity in developed countries. Rural areas and small cities become more attractive.
- Despite a potential deceleration in the speed of urbanization, it is premature to declare the end of big cities. As history shows, cities can recover after a crisis, but this requires adjustments to make them more resilient.
Inequality
• The COVID-19 pandemic and the measures governments have implemented to contain the spread of the virus affect people within and between countries quite differently.
Socially disadvantaged population groups are more likely to suffer job losses and lower-income. While wealth has remained steady thanks to decisive fiscal and monetary action1, the pandemic has set disadvantaged population groups apart through inequality of opportunities in education, health, access to jobs as well as higher infection risks due to working and living conditions. As a result, COVID-19 will likely see policymakers focus on corrective measures.
Turning the focus to politics, we see long-term implications to the power of the state and a shift from multilateralism to multi-alignment:
• The COVID-19 pandemic impacts geopolitics in various ways, primarily by exacerbating existing trends away from multilateralism to increasing multi-alignment. The focus on a stable multipolar balance will gradually shift toward supply-chain safety and greater self-reliance.
• The EU’s agreement on an EU Recovery Fund with significant green-economy targets again illustrates that crises usually lead to more, not less, European integration.
• There is no evidence that authoritarian regimes are more successful than democratic countries in fighting pandemics. Both can fail or thrive in a pandemic. Therefore, they will continue to co-exist. Success or failure depends on various factors like experience in past health crises, speed of action, the ability to take effective policy actions, people’s trust in the government, and cooperation within and among countries.
• The pandemic may trigger desirable changes like an improvement of social security nets. Too much state intervention, however, may hamper economic activity and undermine individual responsibility. In the past, conflicts, diseases, economic downturns and mass unemployment often led to an expansion of the state. If history is any guide, the extension of state powers during the COVID-19 pandemic may well outlast the crisis.
From a technological standpoint, the study suggests increased remote working and greater focus on lifelong learning:
• Remote work is here to stay, since employers and employees alike will favor solutions that have proved convenient and cost-effective during the pandemic. Demand for office space and business travel will likely decrease as a consequence of the shift toward remote working and cost pressure that companies face.
• Although the pandemic may give EdTech a boost, educational institutions will not disappear due to their critical role in integrating and teaching students social skills and societal norms. Lifelong learning will become a key part of everyone’s life to create an adaptable work force and develop skills that stress human advantage over machines.
“Throughout history, health crises have helped to drive scientific and social innovation, shaping the paths of future economic development. The current crisis will be no exception, but rather than radically changing the world as we know it, COVID-19 has mainly accelerated existing trends, triggering a structural change in fast motion in many sectors.”
Sara Carnazzi Weber, Head of Policy & Thematic Economics at Credit Suisse
“The immediate impact of the pandemic was stark as stock markets and society at large struggled to grasp the severity of the situation. Swift and powerful policy reaction from governments and central banks providing credit arrangements and quantitative easing, however, have helped usher in a stronger and quicker period of recovery. We expect the long-term consequences to be less negative than of other major recessions.”
Nannette Hechler-Fayd’herbe, Chief Investment Officer International Wealth Management and Global Head of Economics & Research at Credit Suisse
