Economies after the COVID-19 crisis
Bold innovation by some firms under pressure of the pandemic could deliver a productivity dividend, but that depends on corporate action broadening and robust demand.
In its latest report on productivity and growth after pandemic, McKinsey and Company states that the pandemic caused the deepest economic disruption since World War II, disrupting both supply and demand. The way ahead is extremely uncertain.
Despite the pressures on them and high levels of uncertainty, early evidence indicates that many firms were bold and innovative in response to the pandemic. Companies shifted rapidly to online channels, automated production tasks, increased operational efficiency, and sped up decision making and innovation of operating models. This could potentially more than double the rate of annual productivity growth observed after the global financial crisis.
New McKinsey Global Institute research finds that there is potential to accelerate annual productivity growth by about one percentage point in the period to 2024. That would be more than double the pre-pandemic rate of productivity growth — a welcome positive.
Realizing this potential requires action to be more widespread and demand to be robust. Both are possible but not given. Early evidence suggests that most action thus far is focused on large, superstar firms. Moreover, 60 percent of the productivity potential could come from action to improve efficiency through, for instance, accelerated digitization and automation. Absent action, the risk is rising inequality and unemployment, undermining demand just when it is needed most and putting the prize of a productivity dividend in doubt.
Much depends on the decisions taken by businesses and policy makers. 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.
As economic activity plunged during the pandemic, many firms took bold 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. The advances on a range of drivers that have boosted productivity in the past may offer the potential to raise the economy-wide pace of productivity growth considerably. However, positive action appeared to be concentrated in large leading firms.
