PETER LITTLE: What’s up and what’s down in major economies as the pandemic lifts

Eighteen months after Covid-19 brought the world to a halt, we compare pre-pandemic economic activity to the current state of play and the path travelled to get here, and try to find clues about what post-pandemic life might look like regarding the drivers of economic activity. The focus is on the three largest economic regions — the US, EU and China — which collectively represent 60% of global economic activity.

If International Monetary Fund (IMF) forecasts for 2021 economic activity are correct, the US, EU and China will see higher nominal economic output (in dollar terms) of 6%, 10% and 16%, respectively, compared with 2019, despite the lingering pandemic influence on 2021 economic activity.

These powerhouses punch significantly above their weight in demographic terms, particularly the US and EU, which represent 10% of the global population and account for 42% of global economic output. Reported vaccination rates are encouraging, apart from the US (56%), which might need a little more effort to ensure a higher likelihood of achieving the desired “herd immunity”.

The movement restrictions governments introduced during the pandemic were aimed at protecting people’s health and avoiding overwhelming hospitals but came with an economic cost that affected many people’s ability to maintain employment. China does not provide detailed, frequent employment data, but available data suggests that the unemployment rate in major Chinese cities increased less than 1%.

Due to the EU’s social safety net the unemployment rate rose slowly as governments used pre-existing systems to support employers, allowing the populace to maintain employment despite being unable to work. The US experienced the biggest and most immediate impact on employment, with the number of people employed dropping by about 25-million within a month of the start of movement restrictions.

Unemployment rates remain elevated relative to pre-pandemic levels but appear to be on a positive recovery trajectory. However, low-paying service sector jobs, particularly in leisure and hospitality, are yet fully to recover. The impact on aggregate earnings was muted as governments stepped in to fill the income gap. Despite job losses the US saw aggregate earnings of the population increase during the pandemic because of expanded unemployment benefits and other forms of stimulus, including $800bn in cheques the government gave directly to citizens.

Large spike

Because of generous state intervention most of the increased debt burden fell on governments, which are significantly more indebted than they were before the pandemic. Central banks played an important function in maintaining the integrity of the financial system as the pandemic hit. The US and EU pumped significant liquidity into the financial system via quantitative easing, with the  US Federal Reserve and European Central Bank doubling the size of their balance sheets since the start of the pandemic, buying $9-trillion worth of bonds and keeping borrowing rates suppressed.

Mobility restrictions, with the stimulus provided by governments and central banks, have had an interesting effect on consumer behaviour. With large parts of the service industry (particularly travel and leisure) unavailable, consumption shifted towards buying goods, with a particularly large spike in spending on cars and DIY. Conversely, spending on restaurants and bars has surpassed pre-pandemic levels only in the past few months.

The shift towards online spending was a key theme of the pandemic. US Census Bureau retail sales data is showing that the share of US retail sales happening online seems to be reverting towards its pre-pandemic trajectory.

The other major shift in behaviour during the pandemic was towards working online, remotely or working from home, a phenomenon applicable to more than 40% of US and EU workers. There is still much debate on how much the working from home phenomenon will continue once the pandemic has run its course, but indications are that it remains a meaningful, even in economies where mobility restrictions are easing.

Global travel

Google mobility data related to workplaces reflects a level of 20%-30% below US pre-pandemic levels, but it would include 60% of the employed population that does not have the option of working from home, suggesting those able to do so are doing so about 40% of the time.

Global travel is still heavily affected by mobility restrictions, which will take some time to ease, but domestic travel is starting to return in more vaccinated countries. Airlines Reporting Corporation data suggests US airline ticket sales are running at 40% of 2019 levels. Presumably these are heavily affected by the lack of international flights, but the other notable conclusions are how:

• Quickly ticket sales receded in August/September as Delta-variant infections spiked;
• Bookings by corporate travel agencies lag most; and
• Much faster online ticket sales recovered versus those of travel agencies.

Economic activity in major economies is back above pre-pandemic levels, but the shape of economic activity is still being influenced by mobility restrictions, including above-average retail sales, skewed towards a larger proportion of purchases of goods than before the pandemic and still partially funded by elevated savings levels, propped up by generous government support.

Those who are able to work from home are still doing so significantly more often than before the pandemic, and travel remains well below pre-pandemic levels. It is too early to assess how sticky these changes will be, but it seems there is still going to be some level of reversion to pre-pandemic behaviours as mobility restrictions continue to abate over the course of about the next year.

• Little is fund manager at Anchor Capital.