Capital Economics: Covid aftermath not as bad as the global financial crisis

It’s likely the Covid-19 crisis may not be as devastating as the aftermath of the global financial crisis, though it’s vital the government avoids policy missteps.

That was the view of Neil Shearing, group chief economist of economic consultancy Capital Economics.

Shearing noted how before the global financial crisis there was excessive credit growth, while crises can cause unemployment and therefore skills atrophy, as well as weak demand.

But he said: “Viewed through the same lens, the Covid crisis looks rather different. For a start, potential growth in many developed and emerging economies had already fallen sharply before the crisis, thus lowering the bar in terms of a path back to “normality”.

“What’s more, although the crisis will shrink some sectors, these are generally lower productivity ones such as hospitality and leisure.

“And while some capital stock has been rendered obsolete (airlines, some office space and so on), the crisis is likely to spur investment in new areas, including digital technology.”

Based on Shearing’s writing, it seems we might see a rebalancing of the economy, while its subdued nature before the crisis could make it easier to recover.

However he added that there is a danger of the UK taking a big economic hit if gets it wrong in terms of policy.

Shearing added: “The prospect of an extended period of demand weakness… [is] the chief reason to be concerned about the effect of the virus on long-term growth.

“For now, the effect on demand is being mitigated by wide-scale fiscal support. Provide that this support remains in place until the virus has been brought under control, it’s possible that the long-term impact of the virus on aggregate GDP may be smaller than many currently assume.

“Accordingly, while there are plenty of reasons to remain concerned about the near-term trajectory, so long as governments avoid policy missteps, some of the pessimism around the longer-term economic effects of the virus may be overdone.”