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Jeff Meli Christian Keller

Episode 31

Jeff Meli in conversation with Christian Keller

Will COVID hurt or help long-term growth?

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The combination of COVID-19 vaccine rollouts and the major fiscal and monetary stimulus enacted this year should contribute to a swift economic recovery in 2021 for developed economies, with emerging markets benefiting both directly and indirectly. The short-term outlook is looking up, but is the global economy out of the woods over the longer term?

In the final episode of The Flip Side for 2020, Head of Research Jeff Meli and Head of Economics Research Christian Keller discuss the economic legacy of the coronavirus pandemic, how it compares with historical economic shocks such as the Global Financial Crisis, and its short- and long-term effects on economic growth, as well as policies and practices ranging from taxation to public spending and productivity.

  • Jeff Meli: Welcome to The Flip Side. I'm Jeff Meli, the Global Head of Research at Barclays. And I'm joined today by Christian Keller, our Global Head of Economics Research. Thanks for joining me Christian.

    Christian Keller: Thanks for having me Jeff.

    Jeff Meli: And today we're going to talk about the economy post-COVID. And I know that seems like we're jumping the gun a bit because cases continue to climb globally, but we've had great news on the vaccine lately with very high efficacy rates and we do expect to reach population immunity sometime in the middle of 2021.

    So while we don't want to downplay the continued human and economic toll the virus is having now, we also need to start looking forward to what a post-COVID economy will look like.

    Christian Keller: Maybe it's the good news on the vaccine or maybe it's the holiday season but I'm actually feeling quite optimistic about the post-COVID economy. And not just in the short run where following this year's very deep contraction, we expect next year to have one of the strongest global growth rates for some time. I actually think we may be laying the groundwork for robust and sustainable growth beyond next year.

    Jeff Meli: Well, Christian, I don't want to sound like a Grinch, but I am much more pessimistic. Now on the short run, I agree that the combination of good news on the vaccine front and the major fiscal and monetary stimulus that has been enacted will make for a pretty swift recovery next year. Beyond that cyclical rebound, I think we're going to be dealing with the economic aftershocks of COVID for some time.

    Christian Keller: Well, it's interesting, we agree about the strong out – I mean the short run and we do think that next year should be probably the highest growth rate since right after the global financial crisis. But we disagree on the long-term. Now typically, when recoveries have significant momentum, they do have a good chance to become self-sustaining.

    Jeff Meli: Unfortunately Christian COVID has been such a severe shock to the economy that there's room for both a meaningful immediate recovery and longer term disappointments. My pessimism is based on our poor experience with crises.

    Most recently and obviously after the global financial crisis, the global economy suffered a major setback in the trend of growth, that means that growth rates were lower post crisis than they were beforehand and that lasted for over a decade. That translates into a lot of missing output. So while we may have a robust recovery in the immediate aftermath of the pandemic, the end state will be even slower growth again.

    Christian Keller: It is true that trend growth globally was low after the global financial crisis. But I think there are reasons to believe that the recovery from the COVID crisis may be better than that after the global financial crisis.

    In 2008, 2009 we experienced a massive global financial crisis and we have a lot of evidence through history that trend growth after such financial crisis is down and for a long time. And COVID has certainly cost a lot of problems, but systemic issues in the financial system is not one of them.

    Jeff Meli: That is true. Certainly the reforms put in place displays the financial system seem to have worked. But I think you're being too quick to dismiss parallels between the current crisis and the last one.

    We may not have a balance sheet recession in the financial sector, but we do have a massive increase in government debt. The fiscal stimulus enacted globally in response to COVID has been enormous, actually far in excess of what was done over the global financial crisis, we’re even seeing it from countries that have been very reluctant to expand their deficits like Germany. And while all this spending was likely necessary to minimize the damage done by COVID, I think it will weigh on the recovery going forward.

    Christian Keller: Look, the main reason why financial crises lead to poor recovery is that the credit channel becomes disrupted. Banks can’t get money to the right borrowers if everyone is repairing their balance sheets.

    This time around, we should not have a problem even if we likely see some increase in nonperforming loans. Indeed what we are seeing is a massive buildup of excess savings in form of deposit at banks. So if and when confidence returns, this could in principle massively boost credit growth and demand.

    Jeff Meli: Yes, again, I agree that the pressure on banks is limited. In fact, if anything, banks are a source of strength for the economy during this crisis. It's not just banks that have to repair their balance sheets after a crisis, it's governments too.

    Christian Keller: Well, I – probably debt can indeed be a problem if it crowds out the private sector's ability to borrow at reasonable interest rates. But, again, this is not the case now.

    Corporations have had no problem raising debt. I mean, 2020 is a record year for investment grade bond issues in the U.S. and the interest rate that corporations are paying are low both in absolute terms and relative to government yields. So I don't see evidence that the private sector’s under any pressure in this regard.

    Jeff Meli: You're making a good point about the availability of financing now. Savings rates are high and this means investors are looking for opportunities and companies have certainly taken advantage of that.

    Central banks are also buying a lot of assets in response to the crisis and that's probably helping too. But all of that just explains why we're in agreement about the short-term which we think is going to be fine or even very good. In the long-term, governments need to take active steps to raise money to start paying back some of those step and recall how much effort was put into austerity across the developed world after the financial crisis.

    It was in Europe as well as in the U.S. That austerity contributed to lower growth too. It wasn't the strain on banks, it was the strain on governments and this time around, governments’ finances are in far, far worst shape.

    Christian Keller: The commitment to austerity was indeed contentious. But I believe something fundamental has changed regarding our understanding of the debt levels that are sustainable at these days in particular for governments of large developed economies.

    And in the current environment, they can borrow at such low interest rates actually often they pay interest rates that are below their economy's growth rate. So I don't expect governments in this environment to make the same mistake and to overly quickly turn to reducing debt and deficits and to basically contribute to exactly what you just described.

    Jeff Meli: Well, Christian, you may have learned that lesson and I actually agree with you. But I'm just not sure that policymakers have learned that lesson. We've seen a lot of energy lately on what new taxes should be passed. That's not something we’d need if we were just going to live with these debt levels for the foreseeable future.

    Some of it is about increasing existing taxes, certainly, for example, the Biden platform when he was a candidate for president included sharp increases in corporate taxes, income taxes, social security taxes, capital gains taxes, estate taxes, it was a pretty fulsome list.

    Christian Keller: You're right. The taxes are actually being discussed in the U.S. and Europe and elsewhere. And that is true. However, at least for now, their aim does not really seem to be a quick closing of budget deficits because if you look at this, they're actually accompanied by large spending ambitions, in particular, in the area of public investment in infrastructure, green energies, digitization, et cetera.

    So the nuances of these plans vary between the U.S., Europe, and the U.K. but definitely from the situation after the global financial crisis, I do not sense an urge to reverse a debt increase to reduce public spending. Now the policy that often was called austerity. What I see instead is an emphasis on use public investment as a vehicle to contribute to growth.

    Jeff Meli: You know Christian, I actually think governments are going to get just as creative about raising money as they are about spending it and that we're really only scratching the surface. There's a lot of other new taxes being considered in addition to raising all the existing taxes that I talked about just before.

    For example, we're seeing talk of a digital services tax in France which was talked about that for a long time and most recently in Canada. We have talk of a financials transaction tax, Europe has talked about that for a long time. Just recently, New Jersey got very close to passing a financial transaction tax.

    Now a carbon tax is another example that has been floated. Most recently, I've even heard talk of an Amazon delivery tax being considered in New York City. So my hurdle for thinking about taxes is that they become a drag when they become a driver of decisions.

    So, for example, we did some analysis last year about a tax on ride hailing in New York City, we used taxi and limousine commission data to examine whether consumers changed their behavior and we found pretty stark changes, particularly in Manhattan where that tax was most applicable. We heard talk of companies like NASDAQ considering moving their base of operations outside of New Jersey in response to a financial transactions tax.

    Most recently in the news, Elon Musk announced that he was moving to Texas. So governments need money, developed markets are already very heavily taxed, they're going to have to get creative at finding new sources of revenue, it's hard for me to imagine that we avoid a long legacy of distortions to the economy as a result.

    Christian Keller: This is a very interesting point because the proponents of these taxes would probably argue they're not creating distortions, but the purpose of these taxes is actually to reverse existing distortions.

    For example, a carbon tax tries to internalize external damage with the burning of carbon fuel creates to environment. Digital services and these type of delivery taxes try to make e-commerce pay for the use of public services where due to the nature of their online business they have been able to avoid to pay these type of taxes or the kind of fees that traditional retail businesses, hotels or regular taxi companies have to face.

    So this is really a challenge that existed independently of the COVID crisis. However, I do agree that getting these taxes and the related incentives right will be quite tricky and it could create other distortions along the way.

    Jeff Meli: And from that perspective, of course, almost every tax tries to achieve some additional effect than purely raising revenues like reducing inequality, for example, shifting more income to those who have a higher propensity to consume could also deal with concerns about low demand and a glut in savings.

    I would still caution that in the longer run the enormous increase in debt that we had witness will need to be met by governments trying to raise more revenue and that has rarely been a positive for long-term growth.

    Christian Keller: OK. Jeff, let's move beyond the issue of higher debt. I would like to draw perhaps a more uplifting parallel to past crisis episodes.

    I think one can argue that this pandemic has created somewhat of a war-like situation in which immense efforts are being made supported off by large public spending to make progress in certain areas. And rather than weaponry, this has been this time in the medical research for vaccines, the logistical efforts to run an economy in social distance mode, including especially teleworking and the ability to work from home. And this brought significant innovations on a number of fronts, healthcare obviously, but also in terms of fast forwarding the transition to digital economy.

    Jeff Meli: So you're talking about Zoom to the rescue here on the economic front?

    Christian Keller: Yes, kind of. But let's start with healthcare. We've been able to develop a vaccine in much faster time than thought possible just a few months ago. It's an astonishing 11 months sprint that enabled us to harness a new genetic technology, messenger RNA, to create a vaccine against COVID.

    Jeff Meli: Yes. It's certainly an amazing triumph, nine months after the first New York City lockdowns, we have a vaccine that's considered to be 95 percent effective. But how is that going to help the prospects for long-term growth?

    Christian Keller: Well, first, healthcare is about 70 percent of the U.S. economy and with an aging population throughout the developed world, it will only grow in importance. And from what I understand, this messenger RNA technology could become a new much more widely applied powerful medical tool that turns cells into bespoke protein factories so to say. Some research has been underway on this for a long time but with limited attention. And now there has this been sudden breakthrough that could really make a difference.

    Jeff Meli: Look, ideally this does lead to better health outcomes, but I still think the economic benefits remain speculative at least in the long run. Let's remain closer to home and focus on the digitization and productivity gains that you mentioned.

    I think many of the trends were already happening, like the shift into e-commerce, that was clearly a longstanding trend. I'm not sure why merely accelerating an existing trend would lead to a major boost to growth. Measured productivity growth has been quite low in the developed world for some time, why now is increased digitization going to show in productivity?

    Christian Keller: That is a good question. And something similar happened in the late '80s when economist Robert Solow famously quipped, you can see the computer age everywhere but in the productivity statistics.

    And it wasn't until the mid '90s when productivity did show up in the statistic and boomed. And it's off the case that the full adaption of new technologies from initial innovation to what we call general purpose technology which then really boosts economic growth, it takes time and the same was true for other innovations like the steam engine, electricity, et cetera.

    So it feels as if the COVID crisis may have been that catalyst for our economy to making full use of some of those digital technologies that may have been already available for some time but not – had not really reached their general purpose level, and this widespread permanent use of e-commerce, the ability to use remote working as a part of our lives in an everyday way and very organized manner.

    And we have been waiting for the driverless car but perhaps actually it's the discovery that teleworking actually works that may turn to a more immediate boost for productivity.

    Jeff Meli: I'm not sure that teleworking is all positive. So sure, you've (inaudible) but there are some productivity losses from this model of working too. Some of the productivity gains are such as unplanned meetings and interactions that lead to great ideas.

    That's the reason why we have centers of excellence like regional centers of finance or manufacturing or technology where you – they form into a cluster. And you're basically suggesting that we would lose all of those gains in exchange for a little bit less time on the subway or the tube and that that would end up being positive for growth.

    Christian Keller: I do agree that calculating net productivity gains may not be straightforward. But I think one can assume that in a non-pandemic environment where teleworking is no longer a necessity, only the efficient arrangements will become permanent. We now have the capacity to find a balance where before we did not. I think this option must be boost efficiency.

    Jeff Meli: I can see why a hybrid model where you do more working from home and less commuting could result in a lot of saved time and then that time gets redeployed into some combination of work and leisure and so that ends up being a boost to the economy.

    But there's another path that could take which would have no effect. There's this constant known as the Marchetti constant which seemed withheld throughout history whereby workers are willing to commute about an hour a day into work and in the stone age is that meant that you had to work an hour and, of course, today that means sitting on a train for an hour.

    But if workers simply concentrate their commuting time, let's say you only go to the office three days a week, but you're still willing to do the same sort of weekly commute, maybe you just move further away. And so we don't actually have any safe productivity, it's just that you facilitated sort of a more dispersed environment in terms of where people live.

    Christian Keller: First I would say, I think there are a lot of jobs where the reliance on chance encounters disperse huge innovations is just not realistic. There are a lot of drops that can be done primarily entirely from home with savings in real estate, commuting, carbon consumption, et cetera.

    More importantly, the same things I'm talking about are not limited to commuting time. In a truly digital economies – economy, there are all sorts of efficiencies, Internet of Things, smart technology, increase efficiency in supply chain, et cetera, the point I'm trying to make is that we crossed (a rubicon), technology is embedded in our day-to-day way of doing things and that is necessary for these improvements to take a hold and I think COVID in many ways fast forwarded that process.

    Jeff Meli: All right. Christian, I can see that you're quite enthusiastic about this transition and, of course, I am also looking forward to the day when my smart refrigerator orders my milk for me. We're going to watch this tension between the drag from high debt and the benefits of improved technology play out overtime.

    In the meantime, clients can read our latest take on how all aspects of COVID will affect the economy in our latest global outlook entitled, "Emerging from COVID Shadow" which is available on Barclays Live.

Authorised clients of Barclays Investment Bank can log in to access related reports on Barclays Live:

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About the analysts

Jeff Meli is Head of Research within the Investment Bank at Barclays. Jeff joined Barclays in 2005 as Head of US Credit Strategy Research. He later became Head of Credit Research. He was most recently Co-Head of FICC Research and Co-Head of Research before being named Head of Research globally. Previously, he worked at Deutsche Bank and JP Morgan, with a focus on structured credit. Jeff has a PhD in Finance from the University of Chicago and an AB in Mathematics from Princeton.

Christian Keller is Global Head of Economics Research at Barclays, leading a team covering both developed and emerging markets. Christian is based in London and joined Barclays in 2007 from the International Monetary Fund (IMF), where he had worked since 1999.

Based at the IMF headquarters in Washington, DC, Christian worked on IMF programs with emerging market economies in Europe, Latin America, and Asia and served as the IMF’s Resident Representative in Turkey from 2005 to 2007. Christian graduated with a PhD in Economics from University of Köln, Germany, and holds a joined-MA in Economics and Finance from University of Köln and HEC, Paris.

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