In the space of little more than a decade, two quite extraordinary global shocks—the financial crisis and the pandemic—have jolted investors. At first the economic toll of Covid-19 looked set to exceed that of the banking meltdown. Now the pandemic seems likely to wreak much less enduring harm on western economies. Could this be why stock markets in America and Europe have been surprisingly buoyant this year?
The initial loss of GDP from the pandemic easily eclipsed that triggered by the 2008 crisis. Output in Britain sank by 10 per cent last year, whereas it dropped by 4 per cent in 2009. Global GDP fell by 3 per cent in 2020 compared with a decline of 0.1 per cent in 2009.
But economies have become far more resilient since collapsing during the first wave of the virus. That was already apparent before this year’s mass vaccinations. After slumping by a fifth in the spring of 2020, GDP in Britain rebounded in the summer and even carried on rising a bit late last year, despite the lockdown in November.
In America, GDP already exceeds its pre-pandemic high, reached in the final quarter of 2019. Output in Britain should regain its pre-Covid level in late 2021—taking two years. By contrast, it was not until the spring of 2013 that the economy was bigger than its peak before the financial crisis—taking five years.
The slow-motion recovery following the 2008 shock reflected the financial fragility of companies and households, which had built up excessive debt in the long preceding boom. Getting to grips with that indebtedness took time. Moreover, banks became much more cautious. By comparison, the corporate and household sectors are emerging from the pandemic in much better shape. Covid has undermined the balance sheets of some firms such as airlines, while workers in sectors such as hospitality have suffered financially. Overall, however, companies and especially households have built up savings during the crisis. Banks have emerged from the pandemic fitter than after the financial crisis.
Most important of all is the outlook for productivity—GDP per hour worked. What sapped advanced economies after the financial crisis was persistent sluggishness on this measure, which was particularly severe in Britain. As a result, British GDP in early 2013 was 14 per cent lower than the Treasury had predicted it would be five years earlier.
The long-term prospects for productivity growth following the pandemic are more promising. There is no compelling reason why it should weaken; if anything it should strengthen, thanks to the enforced fillip given to the digital economy and hybrid working. Illustrating the potential for such efficiency gains, the American confectioner Mars is planning to cut its global business travel by at least half, declaring: “We will travel for purpose rather than presence.”
One of the worst features of coronavirus is “long Covid,” the persistent ill-health that some people suffer after being infected. In a way that is what happened to the economy following the financial crisis. But, looking beyond current supply disruptions, the pandemic itself is unlikely to leave such a baleful economic legacy. Viewed in this light, maybe American and European stock markets aren’t as giddily priced as some fear.