8. Economic capital and COVID-19

The global economy plunged into recession following the outbreak of the COVID-19 pandemic as most economic activities were impaired by the lockdown. Over the past century, the depth of the current recession has been exceeded only by World War Two and the Great Depression (World Bank, 2021[1]). Across OECD countries, GDP growth rates shrank on average by 10.4% in the second quarter of 2020 although growth rebounded sharply in the third quarter of 2020 and reverted to its pre-pandemic level in the first quarter of 2021 (Figure 8.1). This unprecedented crisis is having a large impact not only on current well-being, but also on the future, due to disruptions to investment in the resources that sustain well-being over time – including stocks of economic capital. In addition, economic sustainability is at risk when debt (incurred by governments, the corporate sector or households) rises. Although the COVID-19 pandemic has had severe impacts on short-term economic production, the impact on economic capital has differed across economic sectors and types of assets. In 2021, global economy recovered, but the recovery remains uneven across countries, sectors and demographic groups in terms of output and employment (OECD, 2021[2]).

Uncertainty remains high after peaking at the onset of the COVID-19 pandemic. Across 29 OECD countries, the World Uncertainty Index (WUI) from the IMF – an index derived by counting the occurrences of the word “uncertainty” in Economist Intelligence Unit country reports (Ahir, Bloom and Furceri, 2020[4]) – was 0.49 in the first quarter of 2020, an all-time high since the index was started in 1952. This measure of uncertainty decreased in the fourth quarter of 2020, yet remained around 60% above its average level during the 1996-2010 period. The expectations of businesses and consumers about future economic performance also stayed low throughout 2020. Across OECD countries, confidence indices among both businesses and consumers, as measured by opinion surveys, were mostly below 100 during 2020, indicating continuing pessimism about future performance (OECD, 2021[5]; OECD, 2021[6]). This pessimism risks weighing heavily on investment decisions, with long-term consequences for GDP growth and people’s well-being. At the same time, the ambitious recovery packages being designed and implemented in most OECD countries include a strong focus on investments in digital, energy and transport infrastructure, and on the replacement of energy intensive durable goods with more climate-friendly alternatives. Achieving the medium-term goal of net zero emissions of greenhouse gases will require an overhaul of the stock of economic capital, spurring investment growth in the future.

Gross fixed capital formation fell sharply during the pandemic in all OECD countries, although with different intensity across different types of assets

The level of investment in fixed capital declined sharply throughout the OECD area as economic activities were disrupted and uncertainty reigned during the first wave of the pandemic. In the second quarter of 2020, gross fixed capital formation (GFCF) across OECD countries fell by close to 12%, on average (Figure 8.2, Panel A). This compares to a growth rate of 1.9% in the second quarter in 2019. As many OECD countries exited the first wave of the pandemic in the third quarter of 2020, GFCF rebounded strongly, but this rebound was only temporary and was followed by a further fall as the health crisis deepened further towards the end of 2020 (Figure 8.2, Panel B).

The contraction in GFCF extended to most types of assets, although with different intensity.1 Across 28 OECD countries,2 GFCF in all different types of assets contracted in the second quarter of 2020 compared to the same period of 2019, with smaller declines for cultivated biological resources (-0.6 percentage points) and intellectual property products (-16.2) and much larger ones for: dwellings (-30.6 percentage points), other buildings and structures (-34.1), and machinery and equipment (-38.2) (OECD, 2021[7]). As a consequence, the share of investment in machinery in total GFCF across 32 OECD countries declined by 3.1 percentage points in the second quarter of 2020 relative to the previous year, while that of buildings increased by 1.7 percentage points (Figure 8.3) and that of intellectual property assets (across 31 countries) increased by 1.0 percentage points, although edging down more recently (Figure 8.4, Panel A and Panel B).

High uncertainty has contributed to the volatility of investment in the first year of the pandemic, and this volatility weighed heavily on business decisions. The share of business investment in GDP across the 27 EU members declined by 0.6 percentage points in 2020 relative to the previous year, while that of government and households increased by 0.3 and 0.1 percentage points, respectively (Eurostat, 2021[8]). In the United Kingdom, the business sector (i.e. private and public corporations) reduced its total investment by 11.9% between the fourth quarter of 2020 and the first quarter of 2021, the second-largest fall on record after the 22.5% fall recorded in the second quarter of 2020. Lower investment in transport equipment contributed the most to the fall in business investment, followed by ICT and other machinery and equipment. Evidence suggests that uncertainty in the UK business sector was already rising pre-pandemic, but reached new heights in 2020: text analysis of comments from two official business sector surveys run by the UK Office of National Statistics showed a continuous increase in references to uncertainty and to delaying or cancelling investments since the third quarter of 2018, peaking in the second quarter of 2020 (Figure 8.5).

The pandemic hit small and medium-sized businesses harder than large businesses, due to their difficulties in mobilising liquidity and accessing finance as their revenues declined (OECD, 2021[9]). Evidence from 41 SME surveys across OECD countries, conducted by business associations, think tanks, chambers of commerce or banks since February 2020, shows that more than half of SMEs reported severe losses in revenues; one-third of them feared being out of business without further support within one month, and up to 50% within three months (OECD, 2020[10]). A survey on the business impacts of COVID-19 conducted by the Australian Bureau of Statistics in August 2020 reported that 35% of small businesses (employing fewer than 20 people) expected that it would be difficult or very difficult to meet their financial commitments over the next three months; this compared to 33% among medium-sized business (below 200 people) and 18% among large business (200 people and above) (ABS, 2020[11]).

Average financial net worth of households increased during 2020 while that of governments fell

Household financial net worth rose in 2020, as savings rates increased sharply and consumption expenditure fell. Across 23 OECD countries, household financial assets exceeded financial liabilities by 282% of Household Gross Disposable Income (GDI) in the fourth quarter of 2020 (Figure 8.6). This represents an average increase of 15.8 percentage points relative to the same quarter in 2019. High saving rates (i.e. the ratio of household gross savings to their gross disposable income plus the change in pension entitlements) contributed to this rise. Across 23 OECD countries, the saving rates of households jumped by 12.3 percentage points in the second quarter of 2020 relative to the second quarter of 2019, while household expenditure decreased by 14.4% (Figure 8.7, Panel A). By the third quarter of 2020, consumption expenditure was beginning to recover and savings rates to decline, but both remained far from pre-pandemic levels (Figure 8.7, Panel B).

Growth in average savings rates masked different experiences among different households. A Bank of England survey in the United Kingdom conducted between August and September 2020 found that high and middle-income households were more likely to increase their savings, while low-income, unemployed and furloughed households were more likely to deplete their savings (ONS, 2021[13]). For example, the share of high-income households who reported that they saved more than in the past (42%) was almost two times larger than the share among low-income employed households (22%). In the United States, a Pew Research Center survey conducted in January of 2021 indicated that 32% of high-income households and 22% of middle-income households reported they saved more since the COVID-19 outbreak began, whereas only 16% of low-income households did (Pew Research Center, 2021[14]).

Looking beyond household financial net worth, some evidence suggests that inequality in (total) wealth across households increased since the pandemic. While very limited statistics are currently available to assess the evolution of overall wealth inequality during the pandemic, evidence for the Unites States suggests that the wealth of the top 1% of income earners has grown over three times faster (135%) than that of the middle 20% (37%) and bottom 20% (27%) between the first quarter of 2009 and the last quarter of 2020 (USAFACTS, 2021[15]). This increase in wealth inequality is partly explained by the rises in house prices. House prices, on average, increased by 4.7% from 2019 to 2020 across the OECD area (see Chapter 2, Figure 2.15). In the United Kingdom, house prices have risen more strongly than the prices of other assets since COVID-19 pandemic; as households in the middle of the wealth distribution have a greater proportion of their total wealth in the form of property, they experienced the largest percentage increase in their wealth (Leslie and Shah, 2021[16]). In Canada, homeowners added over $1 trillion to their net worth in 2020, thanks to buoyant real estate prices, while renters increased their net worth by less than $90 billion (Statistics Canada, 2021[17]).

Government support contributed to sustaining household income during the pandemic. On average, across 22 OECD countries, net cash transfers from governments to households, as a share of household income, rose by 5.4 percentage points in the third quarter of 2020 relative to the same quarter of 2019 (Figure 8.8, Panel A). This ratio (across 20 countries) decreased by 2.2 percentage points in the first quarter of 2021, while still remaining higher than pre-pandemic levels (Figure 8.8, Panel B).

The unprecedented support provided by government to households and businesses in the first year of the pandemic translated into a large decline in government financial net worth. In the second quarter of 2020, the financial net worth of general government as a share of GDP was 6.3 percentage points lower than in the same quarter of 2019 (Figure 8.9, Panel A). Among 26 OECD countries, only Norway experienced an increase in government net financial worth (by 37.9 percentage points), while in Chile, Korea, Sweden and Luxembourg it remained broadly stable. Overall, the OECD average decline in the financial net worth of the government sector during the first year of the pandemic has been steep, but has not yet reached the lows experienced in 2011-14 (Figure 8.9, Panel B).

Government support during the pandemic has helped to keep household debt levels stable, while corporate debt remains high

The pandemic had limited impacts on average household debt so far in 2020, thanks to increased household savings and government income support. In the third quarter of 2020, across 23 OECD countries, the ratio of total outstanding debt of households as a percentage of their disposable income was 121.3% on average, little changed from the same quarter in 2019 (Figure 8.10, Panel A) and well below the 2011 peak (Figure 8.10, Panel B). Nevertheless, the debt burden of low-income households seem to have increase during the pandemic. According to a survey by the Resolution Foundation in the United Kingdom, 54% of adults in households from the lowest income quintile borrowed more to cover daily costs such as food and housing in March-June of 2020 than in the corresponding period of the previous year (Francis-Devine, 2021[20]). Different developments are visible when looking at different types of debt. Total unsecured debt in the United Kingdom declined sharply between March and November of 2020, while mortgage debt decreased by less (Francis-Devine, 2021[20]). In the United States, credit card balances declined substantially, by about USD 76 billion in the second quarter of 2020, while mortgage debt increased slightly (Congressional Research Service, 2020[21]).

The large decline in government financial net worth described in the previous section is mirrored by the sharp rise in government (gross) debt. The share of government gross debt to GDP in the fourth quarter of 2020 was 95.5% on average across 27 OECD countries (Figure 8.11). Between the fourth quarter of 2019 and the corresponding quarter of 2020, all OECD countries recorded rises in their government debt. On average, this share increased by 14.4 percentage points, and by a further 1.6 percentage points in the first quarter of 2021. This reflected expansionary fiscal policies targeted towards reducing the economic impact of the pandemic. Many governments implemented measures to support business cash-flow (e.g. extending deadlines for tax filing, deferring tax payments and granting tax exemptions) and household income and employment (e.g. cash benefits; broadening the coverage of unemployment benefits to self-employed workers; furlough and short-time work schemes) (OECD, 2020[22]). In 2020, the gross borrowings of OECD governments from the market hit the record high of USD 18 trillion, equal to almost 29% of GDP, and are projected to reach USD 19.1 trillion in 2021, remaining at the same share of GDP as in 2020 (OECD, 2021[23]).

Corporate debt remained high during the pandemic, signalling significant financial vulnerabilities. Although central banks continue to support financial markets through a variety of programmes, substantial risks remain (OECD, 2021[24]). A slow economic recovery or an early phasing out of support schemes could trigger additional debt delinquencies and defaults, with higher non-performing loans putting pressures on lenders (OECD, 2021[24]). In the third quarter of 2020, the debt service ratio (DSR)3 of the private non-financial sector increased by 0.2 percentage points on average across 23 OECD countries (to 16.6%) compared to the same quarter in 2019 (Figure 8.12). The corporate debt burden either reached or exceeded levels last observed during the 2008 Global Financial Crisis in over one-third of OECD countries. This escalating debt burden is raising pressure on small firms, many of whom struggle to repay these loans and face an uncertain future. Higher levels of corporate debt also threaten to choke off the recovery by constraining firms’ ability to invest in tangible and intangible assets and to innovate (OECD, 2021[25]).

References

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[4] Ahir, H., N. Bloom and D. Furceri (2020), 60 Years of uncertainty, IMF Finance & Development, https://www.imf.org/external/pubs/ft/fandd/2020/03/imf-launches-world-uncertainty-index-wui-furceri.htm.

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Notes

← 1. National Account data on Investment distinguish between five different asset types: i) dwellings (excluding land); ii) other buildings and structures (roads, bridges, airfields, dams, etc.); iii) machinery and equipment (such as ICT equipment, telecommunications equipment, etc.) including transport equipment (ships, trains, aircraft, etc.) and weapon systems; iv) cultivated biological resources (managed forests, livestock raised for milk production, etc.); and v) intellectual property products (such as R&D, mineral exploration, software and databases, literary and artistic originals, etc.).

← 2. 28 OECD countries are Australia, Austria, Colombia, Costa Rica, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Israel, Italy, Lithuania, Latvia, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom.

← 3. The DSR reflects the share of income used to service debt, given interest rates, principal repayments and loan maturities. It provides a more comprehensive assessment of credit burdens than the credit-to-income ratio or simple measures of interest payments relative to income, because it takes both interest payments and amortisations into account (BIS, 2019[28]).

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