Governments deployed unprecedented policy measures to support people and businesses during the COVID-19 pandemic. The effects of many of these measures are likely to be felt long after the pandemic has receded.
The impact of COVID-related measures is likely to accelerate already established trends, such as de-globalisation, automation and sustainability and reverse decade-long trends, such as international mobility and urbanisation.
Health fears over close human contact and global travel, combined with concerns about the secure supply of essential goods and services, are likely to change the way people, businesses and economies behave.
Our Research analysts offer their insights into four key trends that may come to exemplify the re-shaped global economy - everything from trade to how and where people will live and work in the coming years.
Global trade has expanded enormously since the early 1990s, and by the time of the 2008 financial crisis exports had reached nearly 25% of global GDP.
The downturn that followed the financial crisis shifted the focus to income inequality associated with globalisation. In particular, the integration of China’s vast labour force into the global economy raised concerns about the impact on the incomes of medium-to-low skilled workforces in advanced economies.
In addition, China’s trade and investment practices, as well its apparent ambition to become dominant in crucial technologies such as AI, eventually led to the US-China ‘trade war’ in 2018, with other major economies also increasingly concerned.
The COVID-19 pandemic has revealed new risks to globalisation – specifically related to China’s key role in ‘just in time’ global supply chains that rely on the timely delivery of intermediary goods for production to take place. If lockdowns are to become part of a ‘new normal’, global value chains will intermittently grind to a halt.
China has become the main or even only source for certain inputs, especially in information and communication technology. About one eighth of global exports flow from China, which makes it the largest source for imports in all core economic regions. More importantly, for the majority of these imports China is the dominant producer (more than 50% of imports of a single product) in electronic and machinery products.
Source: US Census Bureau, Japan Customs and Tariff Bureau, Eurostat, Barclays Research
Such dependency could lead multinational corporations to rethink how to build resilience into their supply chains, with a focus on building inventory through ‘just in case’ production. Less trade with China and diversifying production centres could follow, as well as attempts to re-shore some production to domestic suppliers.
Travel is one aspect of globalisation which had continued to thrive since the global financial crisis, making up about 10% of global GDP. Flying between continents and crossing national borders had become increasingly frictionless, encouraging tourism, foreign education and labour migration.
Source: Source: World Bank, UN WTO, Our World in Data, Barclays Research
Rapid urbanisation has also continued unabated as people gravitated to urban jobs and amenities. The number of cities with 5 million to 10 million inhabitants has more than doubled since 1990, and the number of megacities (more than 10m) has tripled from 10 in 1990 to 33 in 2018 and is expected to reach 43 by 2030, according to UN projections.
Overnight, the pandemic put a stop not only to tourism, but also to international business travel, and migration. Countries rely on air travel for different reasons and would be affected by a permanent reduction in air travel in differing ways. The travel sector may only recover partially after restrictions are lifted, as government regulations and changes in people’s behaviour reduce the ease and frequency of travel.
Source: World Bank, Knoema, Barclays Research
The world’s estimated 164 million migrant workers who only temporarily travel to another country for work would be particularly impacted by reduced cross-border mobility. Not only do migrant workers bring economic benefits to their host countries, they often provide significant remittances to their home countries. In Nepal, for example, remittances make up 28% of GDP, while it is 13-22% for Honduras, El Salvador and Guatemala.
Also, could the threat of viral outbreaks trigger a move away from agglomeration? The already accepted 'costs’ associated with urban living such as high housing costs, traffic congestion etc., could pale into insignificance if crowding and mass transport result in an inability to social distance as a preventative measure. Working from home during the lockdown may have also reduced the perceived `costs’ of not meeting colleagues in person. Such a change in behaviour could slow down the seemingly unstoppable growth of megacities, in favour of wider urban sprawl.
Rising production costs, fewer migrant workers, less travel, and the need for social distancing, could all boost automation and digitisation in a post-COVID world.
Working from home accelerated the use of technologies that were previously feasible but not widely adopted. However, the possibility of remote working is not uniform across industries and countries.
Whereas most jobs in high-skilled roles can be performed at home, the same cannot be said for jobs in agriculture, hotels and restaurants, and retail. The pandemic could increase the role of service robots in those sectors. This could further widen existing divides: between low, and middle versus high-skilled workers, 'winner-take-all' digital companies and the rest, and also between advanced and emerging markets. Advanced economies with more technology investment and higher skilled workers are likely to benefit most.
While very different from environmental threats such as climate change, the Covid-19 pandemic showed just how exposed humanity is to “natural” events with a global reach. Although fraught with hardship for some, the lockdown also highlighted the positive environmental impact of healthier air and cleaner skies in some of the larger cities. EU lockdown measures are estimated to have prompted a 57% decline in daily carbon emissions.
Source: Nature - climate change: Temporary reduction in daily global CO2 emissions during the COVID-19 forced confinement; 19 May 2020, Barclays Research
Government support for businesses and households could be used not only to restart the economy but also to help transform it. Initiatives could include direct investment in environmentally-friendly solutions or incentivising private investment in low-carbon technologies, with the European Union and the UK indicating that they will incorporate green policies in their recovery plans.
In the midst of a crisis such as the current pandemic, it is extremely difficult to predict which changes will become permanent and which will quickly be forgotten. However, a post-COVID world is likely to see the global economy become less integrated as a result of trade barriers, reshoring of supply chains, and reduced labour migration and foreign direct investment. These changes are likely to have macroeconomic implications, too: global business cycles could become less synchronised, while growth and inflation could become more volatile again. Only time will tell how it will play out.
In the 65th edition of Barclays’ Equity Gilt Study, our Research analysts evaluate the post-COVID economy, fiscal sustainability in the developed world, emerging markets as an asset class, the invigoration of the US labor market, and contemplate the management of risks and uncertainty through shocks.