Predicting the long-term consequences of COVID-19: HSBC's Stephen King

EXPERT OBSERVATION 

Even when "internal lockdowns" come to an end, it's likely that "external lockdowns" will remain in place.

Nations states will likely distance themselves from one another, initially through fear of reinfection from elsewhere.

There will also, however, be pressure to deliver new domestic "social contracts" that, in turn, may threaten the post-WW2 "rules-based" international system.

The return of "strategic industries" and "national champions"

There is likely to be a renewed focus on "strategic industries" and "national champions", a throwback to the 1950s and 1960s.

If political leaders wish to defend the interests of their citizens, they're likely to reject their earlier dependence on global supply chains that, at times of maximum stress, can be a source of vulnerability.

Agreement on common health standards?

A global or regional agreement on common health standards would be a desirable post-pandemic outcome, but this could be a challenge given, for example, the recent US temporary withdrawal of funding from the World Health Organization.

More broadly, the isolationist and protectionist rhetoric that emerged following the Global Financial Crisis may receive additional impetus.

Scarring

While there is a broad consensus amongst forecasters that economic activity will bounce back strongly later this year or in 2021, there is also broad acceptance that the level of economic activity will be permanently lower than it would have been in the absence of COVID-19.

We examine some of the key long-term drivers of this permanent shortfall and consider the varied implications for debt sustainability.

Technology and supply chains

Technology is likely to be a wildcard.

Already, we are learning to work from home and to engage remotely thanks to the internet: for many, the daily commute may become a thing of the past and we may never return to the skies in quite such numbers.

Advances in robotics and AI, alongside the enhanced desire for national security, may lead to a further significant shortening of global supply chains and a renewed home bias in the distribution of capital, leaving some nations states languishing even as others regain a semblance of their former economic selves.

Stephen King is a Senior Economic Adviser at HSBC Global Research