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The World after COVID-19: Long-term Economic Impacts

By: Angelo Kourkafas, CFA® October 01, 2020

COVID-19 is a health and economic crisis unlike any other in modern history, with profound short- and long-term socioeconomic implications. Like other crises in the past, this too shall pass, but life on the other side of the pandemic might look a little different.

Over the past six months, consumers have adapted to online shopping, video conferencing and working from home, while companies have been forced to change how they operate. Are these pandemic-driven changes in consumer and corporate behavior here to stay, and if so, what are the long-term economic impacts? We believe that while the new normal creates new challenges, it also seems poised to accelerate trends that were already underway that have the potential to enhance productivity and drive efficiencies. Here are three broad, lasting changes that could result from the pandemic.

1. COVID-19 acts as a catalyst for rapid tech adoption

  • The coronavirus disruption has accelerated technology adoption by consumers and businesses. Online shopping, digital payments, telemedicine, video conferencing and cloud computing are some examples of services that are experiencing a short-term boost and likely a lasting increase in demand. Online sales, for instance, was the only major retail category to post an increase during the height of the pandemic, and its market share is poised to continue to expand well after the crisis is over.
  • Businesses are adapting to the rapidly changing environment by embracing technology and finding new, innovative ways to serve customers by expanding their digital footprint. These changes would most likely have taken place over the next several years, but the pandemic condensed the timeline from years into months. From an economic growth and corporate earnings standpoint, incorporation of technology could boost productivity, cut costs and raise profitability.

2. Capital and resource allocation priorities could shift

  • Economic models and allocation of capital will likely be revisited once the storm has passed to reflect the new reality. A further shift toward spending online and working from home could weigh on demand for commercial property and office space but increase demand for logistics and warehouse facilities. Residential property in the suburbs could become a more attractive option relative to city centers, and home remodeling could get a boost as homeowners spend more time at home.
  • The geographic footprint of businesses and spending on capital investment could also be affected. The pandemic exposed vulnerabilities in supply chains and the flow of goods, which might lead to some manufacturing returning to the U.S. and businesses spending more on automation.  

3. The crisis leaves a legacy of debt

  • The series of government relief measures announced since the start of the pandemic were necessary, in our view, to help avoid turning the health crisis into a prolonged financial crisis. However, the side effect of the stimulus is that it adds to the sizable government debt, which is expected to balloon to 108% of GDP by 2021, up from 79% in 2019 and the highest in the nation’s history.
  • With rates near record lows and below the economy's potential growth rate, the debt ratios can stabilize and start declining once the economy recovers. We don’t think that higher government debt is a cause of concern in the near term, but in the long term, a combination of tax increases and benefit cuts will likely be needed to reduce the size of the debt. 

Investment implications

The pandemic will likely prove to be an event that reshapes society, industries and the economy in lasting ways. Though a post-COVID-19 world will probably look a bit different, some of the changes that are underway support a positive long-term outlook.
  • Investing in a balanced and properly diversified portfolio across asset classes, geographies and sectors can help better position you to take advantage of the shifts in economic trends and market leadership.* 
  • Focusing on innovative companies, with competitive advantage and the financial resources to prepare for and embrace change and disruption, is paramount in a fast-changing investment landscape. 
  • Lastly, consider the possibility of higher taxes and fewer benefits when planning for your financial future.

Important Information:

*Diversification does not ensure a profit or protect against loss in a declining market.

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