The Covid crisis has persisted despite vaccines and people’s efforts. The new Omicron variant upset all plans for a gradual return to normality. A reversal was inevitable and return to normalcy was replaced by further distancing. A number of countries are now again withdrawing restrictions. New corona strategies are being hatched as data accumulates. However, the Covid economy will remain with us, in one way or another. What is the logic of this Covid economy?
The only constant is perpetual change
At the beginning of the pandemic, people counted the infection waves. Not anymore, because there is no end in sight. Moreover, the latest Omicron storm wave is proving to be more infectious than a regular wave. However, it appears to be less grave and, according to some, even of shorter duration than the previous ones.
The most feasible and desirable scenario is probably one where experts assess the best vaccines for us each autumn and we hope that it will then protect us from potential variants in the winter or at least avert the biggest risks.
Covid economy
Conceivably, a new corona strategy will enable a return to a near-normal life, accompanied by full awareness of the disease and the understandable and ever-changing constraints it entails. The only constant would be perpetual change.
If corona were to become a winter nuisance, societies would be able to adjust, and disruptions to the economy would remain limited. We would be aware of the coming virus and enjoy the summer all the more. We would know when ‘last orders’ would be called just as surely as we know that days would get shorter and temperatures fall.
However, if we were to be pestered by new variants throughout the year, the economic equation becomes more complicated. If so, government support would continue to be necessary, the decisive factors being the gravity of the variant and efficacy of the vaccines.
Covid inflation
More recently, the debate on inflation has focused on whether it is temporary or permanent. Covid inflation may be a permanently temporary development. It would not imply a permanent rate of inflation, but fleeting price rallies caused by supply chain disruptions.
Covid inflation is caused by diminished supply, a sharp increase in demand and a number of bottlenecks. Other contributing factors may include idle funds sitting in savings accounts, which have strengthened households’ purchasing power. The situation is further aggravated by problems due to the shortage of labour. Aside from supply bottlenecks, inflation is affected by collective bargaining, price-setting and monetary policy success. The future will be made tomorrow.
Work and jobs in the Covid economy
The Covid economy has created new concepts for work. Often people work remotely from home. But for many of us it is not possible. For example, work in the healthcare sector is very much tied to location. For a multitude of reasons, pay is not high enough in the healthcare sector, and so many exasperated professionals have left to pursue a different career.
The United States is facing a new problem with exits from the work force. During the pandemic, the temptation to leave unsatisfactory employment is strong. Moreover, wages are too inflexible to allow employers to attract enough workers through better pay. Instead of foreign recruitment, the workable solution is to offer the right kind of salary. It is a tough nut to crack over the next few years. If the logic of the Covid economy endures, pay increases will probably continue in sectors with low pay and harsh working conditions.
Investments in the Covid economy
Digitalisation has taken a great leap forward. Communication between people takes place on digital platforms and tourism is being replaced by virtual travel. Today, technical solutions are of a high enough standard to give a positive digital experience. Had it been necessary to make this digital leap earlier, the experience may have been less rewarding.
The biggest dangers that the Covid economy is exposed to are the risks to cybersecurity and the functionality of IT systems. If digitalisation failed in an economy devoid of all physical contact, it would mean a setback that would take us back several decades. Sending messages by post or courier would be much slower than what we are used to.
The key economic drivers in the corona era are digitalisation and medicine. Digitalisation helps us adjust and medicine may offer a way out in the form of new efficient vaccines.
One might ask where governments should allocate their political and financial resources. The answer should be clear: digitalisation, medicine and a huge amount of other research to solve social, economic and environmental problems. Universities and research institutes are where the most important resources lie, and funding these institutions is at the heart of finding a way forward.
Economic and monetary policy in the Covid era
During the pandemic, the main role in decision-making has been played by governments and ministers. More often than not, decision-making has been hard, and because the problems are complicated, no easy solutions are readily available. Economic policies have focused on supporting people and companies affected by the restrictions. This has been financed by debt, part of which has been bought by the (euro area) central banks.
The monetary policy pursued by central banks means that they act in symbiosis with governments. However, there is no roadmap for a return to normal independent monetary policy. While the will to achieve normalcy is strong, there are those for whom the current situation is favourable. Debt financing is available at low interest.
Taxation is the unwritten chapter of economic policy of the Covid economy. It is not a topic that people are eager to take up in political debate. Even so, it is one of the keys for managing the Covid economy. Now funds keep accumulating in savings accounts at the same time as governments become more indebted.
Covid economy and investors
Investments have yielded excellent returns. Low interest rates in the Covid economy and surprisingly few disruptions to the economy have helped equity markets and given healthy non-recurring returns on investment, including fixed-income instruments. The successful economic and monetary policies pursued during the pandemic have underpinned economic growth and sound returns.
The winners in the Covid economy have been the IT companies that benefit from digitalisation. The world’s best digital companies are located in the United States, and the returns they have generated throughout the pandemic are best in class. However, there are always concerns about hype when share prices shoot up. This has been reflected in the market volatility during the last few weeks.
Conclusions
Covid has given birth to a different economic system where only change is constant. You get used to everything and human beings are fortunately an adaptable species.
The keys to an exit and return to normality will be provided by medical research, efficient healthcare and education. Digitalisation helps us to adapt and succeed in the context of the Covid economy. The benefits offered by research funding are highly tangible. If these efforts bear fruit, the future of the Covid economy or an exit from it may prove bright.
Let’s hope that medical research and product development efforts will come up with efficient tools to combat the virus variants because economic growth very much depends on it.
The writer is VER's CEO Timo Löyttyniemi.
