Four years on from the arrival of the pandemic, 2024 may be the first post-Covid year in which economies are operating in a (new) normal environment

By David Skilling*

Four years ago this month, early reports were coming through from China of a dangerous new virus in Wuhan.  Over the next two years, large parts of the global economy were locked down or restricted. 

But despite the substantial social and health costs, the economic contraction during the pandemic was less severe than had initially been feared; and the recovery process was stronger.  This was partly due to substantial macro policy support, the flexibility and responsiveness of the private sector, as well as the rapid development of effective vaccines.

For the most part, the last wave of meaningful restrictions across advanced economies were lifted from early 2022, allowing for full reopening.  China was the major laggard, lifting severe lockdown measures only at the end of 2022.  Many advanced economies recovered quickly, returning to pre-Covid levels of GDP by the middle of 2021, although there is a gap left to pre-Covid GDP trend.  Substantial GDP was permanently lost as a consequence of the pandemic, as well as the ongoing health costs. 

Back to normal

Despite the rapid recovery, Covid also scrambled the global economy in many ways.  The aftershocks from the pandemic caused the global economy to behave differently, from unexpected inflation dynamics to the expected US recession that never arrived.

The unexpected surge in inflation was partly due to macro stimulus, but also due to various Covid-related supply chain constraints and labour market issues.  For example, labour markets tightened in many advanced economies on reduced migration inflows, reduced participation rates, as well as high quit rates as significant numbers of workers moved across the economy.  This was reinforced by ‘labour hoarding’ by many firms.  

The estimates of the likelihood of recession in the US and elsewhere were well off.  Standard predictors of a recession such as an inverted bond yield curve didn’t signal recession in the US, but rather a resilient economy: strong demand with supply side constraints, requiring higher interest rates before inflation faded, partly for transitory reasons.  Indeed, data out on Thursday reported that US GDP growth was 3.1% in the year to Q4.

And similarly, there was strong growth in world trade flows from 2020 as demand for consumer durables exploded (relative to spending on services), reinforced by high levels of inventory-building as firms tried to strengthen resilience against supply chain shocks.  But this led to excess inventories, and a process of de-stocking – during which world trade and industrial production was weak.  But world trade growth looks now to have bottomed-up, with a better year ahead.

On many of these dimensions, the aftershocks of the pandemic are now fading.  Global supply chain costs and disruptions have reduced sharply (although trade flows are now subject to other shocks, such as around the Suez Canal); labour market constraints have eased with migration at record levels around the world (and into advanced economies like New Zealand, Ireland, and the UK); and quit rates in many advanced economies are back to pre-Covid levels as the labour market reallocation process weakens. 

2024 may be the first year in which the global economy is free from the aftershocks due to the pandemic and operates in a more normal manner.  This will make it a bit easier to understand and interpret the global economy.

Structural change

The ending of the Covid aftershocks will also make it easier to see the ways in which the pandemic has had a structural, enduring impact on the global economy.  In some ways, the post-Covid world is familiar to the pre-Covid world: tourism has rebounded, particularly short-haul; the share of online commerce has settled back to its (rising) longer-term trend after spiking through the pandemic; and the share prices of Covid favourites from zoom to peloton have reduced sharply from their pandemic highs.

Even so, the post pandemic world is different in important ways.  The pandemic has left an imprint.  Along with changes in technology, geopolitics, and so on, these changes will require firms, investors, and governments to adapt.  There are a few that stand out to me:

First, a changed model of globalisation.  Globalisation functioned well during the pandemic, despite many challenges, and trade volumes have continued to grow since.  But the Covid experience led to an increased focus on supply chain resilience, particularly in strategic goods from food and energy to medicines.  Some of this was underway prior to the pandemic, as firms responded to over-stretched global supply chains, but this has been accelerated. 

Governments have become much more focused on strategic autonomy.  This inward turn has accelerated the process of global economic fragmentation, with greater emphasis on supply chain resilience and industrial policy in advanced economies. 

In China, for example, there is an increased focus on import substitution (‘dual circulation’); its imports/GDP ratio will continue to trend down.  And China became a less open economy through the pandemic.  The long closures of its borders led to effectively no flows of international tourists, migrants, and students through the pandemic.  And these flows remain heavily constrained even after borders have been reopened. 

Second, economic geography has shifted.  People are working remotely to a much greater extent; days in the office for white collar workers average about 50% in major cities in the US and Europe.  This shift to hybrid working looks sticky, despite ongoing efforts of some firms to require more days in the office.  The evidence doesn’t suggest big productivity impacts one way or the other.

This has big implications for commercial real estate, the hospitality industry, public transport, and much else.  The upward pressure on house prices across advanced economies – particularly outside major cities – is partly due to increased home working (as well as low interest rates); and the structural element of this increase is likely to persist.

Third, social and political preferences were shifted by the pandemic experience.  Public attitudes on issues from the environment/green (more concern) and family (the birth rate decline has accelerated in multiple countries) to the role of government (more fiscal policy support) have shifted.

And concerningly, the decline in social and political trust has become more pronounced.  Populism is not new (Trump, Brexit), but the lockdown measures took this to a new level (e.g. anti-government conspiracy theories).  Populist parties, particularly in Europe, have been empowered by these dynamics – intersecting with concerns about the cost of living, migration, and so on.  These new political realities will have an enduring effect on policy and governance.

The roaring 20s?

The aftermath of the Spanish Flu after WWI ushered in the roaring ‘20s of social and economic exuberance.  There have been claims that Covid 19 might similarly lead to a roaring ‘20s.  However, from an economic perspective, there is not yet much evidence of an upward shift in the growth trajectory; forecast GDP growth rates across advanced economies are generally lower than in the decade prior to the pandemic.

I will discuss productivity developments in a future note, but I still think that there is a plausible case that trend labour productivity growth will increase meaningfully over the next several years.  This is partly due to the impact of new technologies, notably AI, but is also due to the investments made through the pandemic in digital, capex, new business models, and so on.

Although some of the distortions to economic behaviour from the pandemic are over, Covid casts a long shadow.  The world is different, for good and for bad.

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*David Skilling ((@dskilling) is director at economic advisory firm Landfall Strategy Group. The original is here. You can subscribe to receive David Skilling’s notes by email here.