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2020 economic review: agile responses to the Covid-19 shock

12/11/2020

Covid-19 represents an exogenous shock to the global economy of unseen proportions in recent decades. The reaction has been swift and agile. Central banks have eased policy and injected liquidity whereas governments have put fiscal discipline aside and used their budgets to bring much-needed support.  This has softened the blow from the pandemic. What has also played a role is the agility of companies by adapting their production and/or distribution models to cope with the disruption of supply chains and the impact of restrictions on sales and by making it possible for a lot of their staff to work from home. Most importantly, the development of a vaccine brings hope at the end of a very difficult and challenging year. Vaccination should lead to a lasting economic recovery although questions remain about the possible longer-lasting impact of the pandemic in terms of unemployment and corporate as well as public sector indebtedness.

TRANSCRIPT // 2020 economic review: agile responses to the Covid-19 shock : December 2020

FOCUS

FRANÇOIS DOUX

It’s time for an economic review of 2020, a year marked by a major exogenous shock, the Covid-19 pandemic.

William De Vijlder, hello.

WILLIAM DE VIJLDER

Hello François.

FRANÇOIS DOUX

We’re going to talk about pleasant surprises, because there have been some in 2020. From your point of view, what have they been?

WILLIAM DE VIJLDER

You’re right to say an exogenous shock, one arising outside the economy. The main positive surprise in 2020 has been the response of the scientific community, specifically in terms of vaccines. Who would have thought, when we started to analyse the consequences of the pandemic in early March that we’d be talking about a vaccine being rolled out before the end of the year?

FRANÇOIS DOUX

Presumably that’s a game-changer for the economy and good for confidence?

WILLIAM DE VIJLDER

It’s a game-changer because, without a vaccine, the economy would have continued along a path of a recovery, followed by a shutdown, followed by a recovery etc. The negative consequences of this would have built up over time: i’m thinking of unemployment, business bankruptcies and public-sector debt levels.

FRANÇOIS DOUX

But the other positive surprise in 2020 was the very aggressive and rapid response from central banks.

WILLIAM DE VIJLDER

Yes, the reaction was impressive. An extremely agile response was needed, but it’s still impressive for several reasons, especially the creativity that was shown. Creativity in the sense of being able to adapt to what was needed in the circumstances. In Europe, there was the ECB’s specific quantitative easing plan: the Pandemic Emergency Purchase Programme (PEPP), in which the ECB abandoned its traditional allocation keys. That was crucial in getting yield spreads to narrow massively, helping badly affected economies like Italy and Spain. In the US, the Federal Reserve was able to buy paper issued by companies, which gave them a real lifeline.

FRANÇOIS DOUX

Alongside monetary policy, there was also fiscal policy. Governments took on a lot of debt to support the economy, to support all economic agents.

WILLIAM DE VIJLDER

Absolutely. This was another case of agility, of fiscal prudence being cast aside. Again, it was necessary. But the real surprise was the recovery plan agreed in Europe, consisting partly of subsidies. A EUR 750 billion recovery plan would have been unimaginable at the end of 2019. But they’ve agreed it now, and that’s fantastic.

FRANÇOIS DOUX

As well as central banks and governments, companies and households also had to show agility and flexibility.

WILLIAM DE VIJLDER

That’s right. To illustrate that, there are two factors that come to mind. The first is obviously that many companies managed to let staff work remotely, from home. That was extremely important for them to continue producing, providing services, working etc. So that limited the economic shock, the downturn in output. The second factor was that businesses and retailers clearly made adjustments between the first and second lockdowns. That’s one of the reasons why the second lockdown had a much smaller economic impact than the first. Of course, the restrictions were different and less strict as well. China is also helping our exports. But the ability of companies and retailers to adjust also played an extremely important role.

FRANÇOIS DOUX

But we can’t forget the unpleasant surprises. We must remember the victims, the people and companies that did not survive.

WILLIAM DE VIJLDER

The job losses as well.

FRANÇOIS DOUX

Yes, the unemployment rate. Will these negative factors, these problems, be with us for the long term or not? That’s a big question.

WILLIAM DE VIJLDER

Let’s say that people want to look at 2021 with a degree of confidence. A lot of confidence, in fact, but at the same time, there’s the question of whether the recovery will end up being more sluggish, slower than expected, which would mean that we’re faced with the long-term issues and damage you mentioned. That’s the main unknown in 2021 in my view.

FRANÇOIS DOUX

But you’re also looking at high-frequency data. These are new economic indicators, introduced fairly recently. What are they telling you?

WILLIAM DE VIJLDER

Economists have had to adapt their analysis too. They needed to find indicators showing what’s happening almost in real time. One favourite indicator at the moment is Google Mobility, which shows that, during the second lockdown that has taken place in several European countries (including France), the worst is already behind us in economic terms. We can see that mobility and traffic levels are already improving to some extent, and December should be better than November. And then, obviously, the rebound will continue in January.

FRANÇOIS DOUX

In January: yes William, we’ll speak again in 2021 to review the situation as we enter the new year. Thank you. Now it’s time for the Chart of the Month, in which I’ll be talking to Hubert de Barochez about the economic situation in the UK.

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