Productivity and Innovation

The Covid-19 shock has had asymmetric effects across sectors of the economy, with those sectors that involve the most social contact in consumption bearing the brunt. This column uses data from the Decision Maker Panel business survey data to assess how the spread of Covid-19 and measures to contain it are likely to affect productivity. It estimates total factor productivity in the UK private sector is likely to be lower than it would have been, by up to 5% in 2020 Q4, falling back to a 1% reduction in the medium term. Firms anticipate a large reduction in ‘within-firm’ productivity, primarily because measures to contain Covid-19 are expected to increase intermediate costs. Since the pandemic disproportionally affected firms in low-productivity sectors, and the least productive firms within these sectors, these become a smaller part of the economy and therefore a positive ‘between-firm’ reallocation effect partially offsets the negative ‘within-firm’ effect.

The Covid-19 pandemic poses severe risks for Europe’s economy, but it also presents opportunities. The sharp short-term shock will be followed by large structural changes to the global economy in the long term. This column sheds light on the challenges ahead using data from the European Investment Bank Investment Survey. Large sectors of Europe’s economy, particularly SMEs, need to innovate and adopt digital technologies to avoid falling behind. Policy support needs to evolve from liquidity provision to a more targeted push for structural transformation.