The pandemic caused the deepest economic disruption worldwide since World War II, triggering severe disruptions in both supply and demand. The way ahead is extremely uncertain but there are signs that the stars may align for the global economy after the COVID-19 crisis.
Despite unprecedented pressure and high levels of uncertainty, the global corporate community was bold and innovative in response to the pandemic. As economic activity plunged, companies took intrepid steps that could transform their business over the long term. Some companies’ pace of digitization and other technologies quickened, firms became more efficient and agile, remote working became the norm, and many businesses—and people—went online for the first time. These advances may offer the potential to raise the economy-wide pace of productivity growth considerably, according to a study by McKinsey Global Institute (MGI).
Pandemic responses
The use of technologies such as digitization and automation accelerated considerably during the pandemic. With the right conditions in place, this has the potential to raise productivity by substituting employees or contribute to raising output per worker. In a December 2020 McKinsey Global Economic Conditions survey, 51 percent of executives interviewed in North America and Europe said that they had increased investment in new technologies during 2020. Companies digitized many activities 20 to 25 times faster than they had previously thought possible.
There was also a broad shift toward online channels during 2020. The McKinsey’s Digital survey found that a 59 percent and 60 percent of respondents in North America and Europe, respectively, said that they were experiencing a significant increase in customer demand for online purchasing and/or services as a result of COVID-19.
The pressures of the pandemic also forced many businesses to become more efficient, to rethink their product, business, and operating models, and become more agile, all of which could potentially drive faster productivity growth. According to our executive survey, 42 to 45 percent of respondents in Europe and North America reduced their operating expenditure as a share of revenue between December 2019 and December 2020.
Another potential driver of productivity growth is business dynamism, but here the situation is uncertain, according to the study. The volume of global mergers and acquisitions (M&A) declined by 21 percent in the first three quarters of 2020, compared with the same period a year earlier. Firm entry and exit rates also fell in most countries during the pandemic, but this reflected deliberate government policies to avoid mass bankruptcies. From January to September 2020, bankruptcies dropped by close to 25 percent on average. The creation of new firms declined in most countries, but there were some exceptions. The rate of new business creation increased by 12 percent in Sweden and by 18 percent in the United States. Once direct governmental support tapers off, it remains to be seen whether we will see renewed business dynamism or the declining dynamism observed in some countries for years before the pandemic.
Concentrated advances
According to the MGI study, business acceleration was not broad-based among firms or sectors as of the third quarter of 2020. Advances appeared greater in sectors that were already ahead of their peers before the pandemic in both Europe and the United States. The sectors that had the largest share of firms improving across metrics were information technology (IT), healthcare and communication services. These are large sectors, and if they achieve higher productivity growth, they could have a positive impact on productivity growth in the total economy. However, some other large sectors such as travel, transport, and logistics, as well as some subsectors of manufacturing, experienced considerably less progress.
Productivity boost ahead?
The swift and innovative adaptation of the business community to the crisis could potentially more than double the rate of annual productivity growth observed after the 2008 global financial crisis. The research finds that there is potential to accelerate annual productivity growth by about one percentage point in the period to 2024, which would be more than double the pre-pandemic rate of productivity growth. Achieving 1 percentage point of additional productivity growth per year in every country to 2024 would imply an increase in per capita GDP ranging from about $1,500 in Spain to about $3,500 in the United States.
Further steps needed
Although governments and businesses responded boldly during the pandemic, both must broaden action to deliver on productivity while boosting consumption and investment. MGI experts argue that 60 percent of the productivity potential could come from improving efficiency through accelerated digitization and automation. Failing to take action raises the risk of rising inequality and unemployment, undermining demand just when it is needed most and putting the prize of a productivity dividend in doubt. ”If action that could enhance productivity remains concentrated and if demand is not robust, the recovery could look similar to the sluggish decade after the global financial crisis. If action broadens and demand is strengthened, a period of fast economic renewal more akin to the post-war years could follow,” the study says.


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