A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.
Recessions and shocks change the structure of the economy, accelerating the adoption of technology and new ways of working. Shrinkage in some sectors is accompanied by growth in others. The ‘K-shaped’ recovery is not new.
In the wake of the Great Depression, for instance, came acute distress in heavy manufacturing, shipbuilding and coal mining – along with rapid growth in car making, aerospace, consumer goods and new materials, such as rayon and plastics.
After the stagflation and economic dislocation of the 1970s came a decline in manufacturing and public sector jobs while the financial and real estate sectors boomed. In a period of profound social change, homeownership soared.
The early-1990s recession was followed by a boom in the technology sector while jobs in art, entertainment and recreation surged. Consumers spent heavily on computers, mobile phones and internet connections. Meanwhile the long decline in manufacturing employment continued.
After 2008 global financial crisis the financial and public sectors contracted, while the technology sector continued its ascent and businesses like discount stores, accommodation and food services and arts and entertainment went on a hiring spree. Consumers ditched landlines for smartphones and social media.
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Throughout all of these periods, education, healthcare and professional services grew steadily to serve the needs of an increasingly complex and wealthier services-driven economy.
The process by which economic shocks boost productivity as the firms that survive update their capital stock and adopt new technologies is known as creative destruction, a term popularised by Austrian economist Joseph Schumpeter. Creative destruction describes the way in which downturns drive a reallocation of resources within and between sectors in a search of greater efficiency and new markets.
Creative destruction has been visible during the COVID-19 pandemic. Lockdown restrictions caused a K-shaped shock, in which sectors like pharmaceuticals, e-commerce, tech manufacturing, home goods, renewables, fintech and digital entertainment outperformed. Meanwhile some high street retailers, office property, fossil fuels, travel, entertainment, accommodation and food services have suffered.
The pandemic has served to accelerate existing trends, compressing years of change into a few months. Online retail, working from home and telehealth had risen gradually over the past decade, but surged during lockdowns. The duration of lockdown restrictions, and the unexpected benefits that have materialised, suggest that much of this change will persist beyond the pandemic.
Rapid innovation has been at the heart of the scientific response to the pandemic, delivering several vaccines in less than nine months. The development of synthetic messenger RNA technology has been decades in the making, but it took the urgency of a pandemic for it to be applied to human vaccines for the first time.
Creative destruction is only partly about technology adoption. The rapid development of COVID-19 vaccines was supported by regulatory changes that allowed different trial stages to be conducted simultaneously. Conducting GP consultations by phone has been possible for decades, but it was not until the pandemic that the practice was widely adopted.
The nature of innovation and creative destruction will determine the shape of the global economy after COVID-19. Despite the remarkable technological advances of the digital age, productivity growth in advanced economies has been puzzlingly weak over the past two decades. Could the pandemic be a catalyst for organisational change and the widespread application of technology that could reboot productivity?
New technology can take time to permeate the workplace and effect major change. It took decades for businesses to fully exploit the potential of electricity in the production process. The gap between invention and full exploitation remains wide. It took over two decades for Intel’s 1970 invention of the microprocessor to manifest in the 1990s tech and computer boom. The great hope for this decade is that it will see a more complete application of digital technologies in the workplace in a way that raises growth and welfare.
The potential for gains is perhaps greatest in those labour-intensive sectors, such as education, healthcare and retail, which have historically shown lower levels of productivity growth. Bank of England research has found that productivity growth in the retail sector outpaced the broader economy in the 2010s as e-commerce increased price transparency, putting pressure on retailers to increase efficiency.
The pandemic’s forced shift of many education and healthcare activities online could lay the foundation for significant cost reductions by unbundling activity that can be done remotely or digitally from those that need to be conducted in person. The Office for National Statistics estimates that many tasks in other service sectors, like accommodation and food services, are ripe for greater automation.
The work-from-home experiment of the last nine months has powerfully demonstrated how technology can decouple work from place, in so doing creating new opportunities for work. Bank of England research shows that women, older workers and people with disabilities are both more likely to work from home and less likely to participate in the labour market than other groups. If the pandemic leads, as seems likely, to permanently higher levels of homeworking, it should increase job opportunities for under-represented groups and areas of the country.
Innovation occurs in fits and starts and rarely follows a smooth upward trajectory. Chance and experimentation play important roles. Often inventions designed for one purpose achieve their greatest potential in a different area. The steroid dexamethasone, for instance, has long been used to treat a raft of diseases, including allergies and skin conditions, but is now the treatment of choice in dealing with COVID-19. In the energy sector advances in shale drilling technology could significantly expand the range of potential sites for geothermal plants. In the tech sector semiconductor manufacturer NVIDIA has built on the artificial intelligence used to create deepfakes to improve the fidelity and cut the bandwidth transmission for video calls.
Like electric power at the start of the twentieth century, the advances of the past two decades have yet, fully, to be exploited. The double shock of the pandemic and the climate transition could be the catalyst for unlocking that potential. Here are some of the possible drivers of post-pandemic growth.
The use of mRNA technology to produce human vaccines could spur applications for other diseases like cancer and conditions like cystic fibrosis. The automated collection of health data from sensors could revolutionise healthcare. The sudden shift online of activity in healthcare, education, entertainment and food delivery offers the prospect of permanent gains in productivity. Largescale expansion of cheap renewable energy is likely, in time, to lead to cheaper and more reliable energy, lowering input costs across the economy. In a historic transition electric vehicle sales have gathered pace during the pandemic and will soar this decade. The pandemic has accelerated the use of digital payments, online banking and retail investing apps, changes that seem likely to stick.
The pandemic has inflicted immense damage, but it has also accelerated change across the economy. The recovery that is set to come later this year could be the start of the creative phase of the Schumpeterian growth cycle.