The economic & political consequences of Covid

Big technology firms have announced mass layoffs over the past several weeks, from Amazon to Zoom.  In many cases, this is the consequence of aggressively hiring through the pandemic on an expectation of sustained higher growth.  Although employment in big tech firms remains markedly higher than pre-Covid, tech firm share prices have been marked down on weaker earnings prospects.

Similarly, the surge in house prices in 2020 and 2021 across advanced economies – partly explained by increased demand for more space during Covid – has been unwinding (also due to higher interest rates).  New Zealand and Sweden are good examples.

Covid was a once in a century event, of a scale not seen since the Spanish Flu in 1918-1920.  Lockdowns, border closures, and other restrictions on social and economic activity were imposed for extended periods, disrupting consumer behaviour, business models, and supply chains. 

But the deployment of effective vaccines as well as massive fiscal and monetary policy support generated a strong economic recovery and a return of normality more quickly than initially feared.  Indeed, real GDP to Q4 2022 in the US and the EU is at or above its post-2009 trend. 

So, as with technology share prices, was the Covid shock a temporary event that did not leave a lasting economic footprint?  Mean reversion is frequently a good rule of thumb, but my sense is that the nature, scale, and duration of the pandemic experience has reshaped the world – accelerating some dynamics, as well as creating some new realities.  This can be seen at both micro and macro levels.

This note is available at: https://davidskilling.substack.com/p/the-economic-and-political-consequences