The COVID-19 pandemic caused far-reaching economic consequencesThe return of Keynesianism? Exploring path dependency and ideational change in post-covid fiscal policy. Policy & Society. Volume 41, Issue 1, January 2022, Pages 68–82 including the COVID-19 recession, the second largest global recession in recent history, decreased business in the services sector during the COVID-19 lockdowns, the 2020 stock market crash (which included the largest single-week stock market decline since the 2008 financial crisis), the impact of COVID-19 on financial markets, the 2021–2023 global supply chain crisis, the 2021–2023 inflation surge, shortages related to the COVID-19 pandemic including the 2020–2023 global chip shortage, panic buying, and price gouging. The pandemic led to governments providing an unprecedented amount of stimulus, and was also a factor in the 2021–2022 global energy crisis and 2022–2023 food crises.
The pandemic affected worldwide economic activity, resulting in a 7% drop in global commercial commerce in 2020. Several demand and supply mismatches caused by the pandemic resurfaced throughout the recovery period in 2021 and 2022 and were spread internationally through trade. During the first wave of the COVID-19 pandemic, businesses lost 25% of their revenue and 11% of their workforce, with contact-intensive sectors and SMEs being particularly heavily impacted. However, considerable policy assistance helped to avert large-scale bankruptcies, with just 4% of enterprises declaring for insolvency or permanently shutting at the time of the COVID-19 wave. According to a 2021 global modeling study, the travel and tourism sector alone could contribute to a worldwide GDP loss of up to US$12.8 trillion if the pandemic extended through the end of 2020. The study further predicted over 500 million global job losses in related industries, highlighting tourism as one of the most severely impacted sectors.
Amidst the recovery and containment, the world economic system was characterized as experiencing significant, broad uncertainty. Economic forecasts and consensus among macroeconomics experts show significant disagreement on the overall extent, long-term effects and projected recovery. A large general increase in prices was attributed to the pandemic. In part, the record-high energy prices were driven by a global surge in demand as the world quit the economic recession caused by COVID-19, particularly due to strong energy demand in Asia.
Overall economic contraction
In 2020 global stock markets experienced their worst crash since 1987, and in the first three months of 2020 the G20 economies fell 3.4% year-on-year. Between April and June 2020, the International Labour Organization estimated that an equivalent of 400 million full-time jobs were lost across the world, and income earned by workers globally fell 10 percent in the first nine months of 2020, equivalent to a loss of over US$3.5 trillion. In May 2020, Cambridge University estimated the cost to the global economy at $3.3 trillion to $82 trillion over five years, and in mid 2020 the UN estimated the cost to be $8.5 trillion over two years. A retrospective economic analysis from late 2023 places the cost between $17 trillion and $35 trillion over five years. When the COVID-19 pandemic hit Europe, much of Europe's investment had been high, but it had unexpectedly slowed. In 2019, overall investment in the European Union increased by about 3% over the previous year, surpassing growth in real GDP.
Investment, like other economic activity, fell drastically as a direct result of lockdown restrictions. This effect was particularly noticeable in the second quarter of 2020, when investment decreased 19% year on year, as most limitations were relaxed by the summer. In 2019, firms already had an unfavourable assessment of the economic situation. Overall expectations for sector-specific business prospects, as well as the availability of internal and external funding, deteriorated in the course of 2020. In the European Investment Bank Investment report 2020–21, 81% of the respondents cited uncertainty as the most severe obstacle to investment. 20% of EU companies anticipate a permanent loss in employment, indicating that a sizable proportion of firms are pessimistic about their capacity to "bounce back" once the COVID-19 crisis has passed.
As a result of the pandemic, half of European companies anticipate an increase in the usage of digital technologies in the future. The proportion is considerably greater among companies that have previously used digital technology.
The European Union's public debt is expected to exceed 95% of GDP by the end of 2021, a 15 percentage point rise since the pandemic began in 2019.
From the first to the second quarter of 2020, the EU government debt grew by 8.4 percentage points to 88% of GDP. According to the European Commission, debt to GDP reached 94% by the end of 2020. In autumn 2020, a second wave of infection and lockdowns aggravated the problem.
After one year of the COVID-19 crisis, corporate investment was expected to decline by at least 25%.
The International Monetary Fund (IMF) and other organizations predicted that the European Union's GDP would contract by 6% to 8%, a drop unprecedented since the Great Depression.
The European Union's total real GDP fall was more than 11% compared to the first quarter of 2020, the biggest drop in a single quarter on record.
The reduction in GDP was caused by government attempts to restrict the virus's spread, and it varied greatly between Member States. It was weakest, on average, in Central and Eastern Europe, where real GDP decreased 9.7% in the second quarter compared to the first. It decreased by 11.5% in Western and Northern Europe, and by roughly 15% in Southern Europe. In comparison, real GDP in the United States fell by nearly 9% in the second quarter compared to the first quarter.
In the second quarter of 2020, disposable income per capita decreased dramatically, affecting consumer expenditure, particularly for lower-income families.
The impact of the COVID-19 varied greatly on the industry. Sectors that rely heavily on physical presence, including passenger transportation, the arts, entertainment, tourism, and hospitality, were impacted the worst, with declines of up to 30% in the second quarter of 2020 compared to the first quarter. Industries such as agriculture, banking, and real estate, declined by 3% or less during the same time span. During the 2008 financial crisis, the distribution of economic effect across sectors was extremely varied, with EU manufacturing suffering the worst decrease – over 20% in the first quarter of 2009. The decrease in other sectors was relatively limited, at around or below 6%.
GDP per hour in the EU grew by 0.3 percent in the second quarter of 2020 compared to the same time in 2019, while GDP per employee decreased 11.5%. Access to capital is seen as a barrier by about 55% of businesses. Credit limitations are especially difficult for SMEs and new businesses to overcome. Credit constraints affect 24% of SMEs and 27% of young businesses.
More than two-fifths of businesses (44%) did not experience a year-on-year sales loss as a result of COVID-19 at the time of the European Investment Bank's investment survey, and more than half predicted stronger sales in 2022 than before the pandemic.
In Western and Northern Europe, as well as Central and Eastern Europe, the unemployment rate climbed by roughly 0.5 percentage point. The rise was greater in Southern Europe (1.5 percentage points). The United States increased by 4 percentage points during the same period, reaching a high of 10 percentage points in April in 2021.
44% of enterprises in Central, Eastern and Southeastern European countries incurred losses in 2020 and/or 2021, and 10% did not anticipate to recover from pandemic-era economic losses in 2022. 60% of CESEE enterprises received some type of financial assistance in response to COVID-19, which is the same as the EU average. This was largely in the form of subsidies or other types of non-repayable financial assistance. Only around one out of every ten businesses reports that they are still receiving financial assistance in 2023.
All sectors received support during the COVID-19 crisis, primarily through subsidies. In 2022, energy-intensive Industries had the highest share of firms (22%) still receiving support. Energy-intensive industries and renewables saw the strongest recovery post-pandemic, with sales increased by 76% and 72%, from 2020 to 2021. Other sectors in the EU also experienced significant turnover growth post-COVID-19.
In Europe, the hardest hit sector by the COVID-19 pandemic was electronics, due to semiconductor shortages. The construction sector was most directly impacted by the Russian invasion of Ukraine rather than the pandemic. The digital sector was overall least affected by trade disruptions from COVID-19.
Economic recovery programmes
Nations, cities and other collectives with governance mechanisms worldwide have announced the development and implementation of programmes for guided economic recovery. Some economic recovery programmes include Next Generation EU and Pandemic Emergency Purchase Programme.
Pandemic Emergency Purchase Programme (PEPP)
The Pandemic Emergency Purchase Programme (PEPP) was a monetary policy initiative launched by the European Central Bank (ECB) in March 2020 to mitigate the economic impact of the COVID-19 pandemic. Its primary goals were to maintain price stability, ensure favourable financing conditions across the eurozone, and safeguard the transmission of monetary policy during a period of severe economic disruption. The PEPP allowed the ECB to purchase private and public sector securities flexibly, complementing existing asset purchase programs while addressing the unique challenges posed by the pandemic. The high ability for flexibility in the design of the program is noted as a strategy to keep up with the shifting economic dynamics caused by the global pandemic.
Implementation The PEPP began with a fund of €750 billion similar to the Next Generation EU fund.The Governing Council decided to increase the initial €750 billion envelope for the PEPP by €600 billion on 4 June 2020 and by €500 billion on 10 December 2020, to a new total of €1.85 trillion. A total allocation of €1.85 trillion was dedicated to asset purchases under the program, over its duration of two years. Pandemic emergency purchase programme (PEPP). Pandemic emergency purchase programme (PEPP). Notably, the ECB was permitted to deviate from its traditional capital key rule, which ties purchases to member states' GDP and population, allowing more flexibility in responding to crisis conditions. The program included purchases of government bonds, corporate bonds, and securities issued by European institutions. Purchases first began in March 2020.
Effectiveness The PEPP was initially effective in stabilizing financial markets during the pandemic, reducing borrowing costs for governments and corporations while supporting credit flows. Its flexible approach was particularly beneficial for countries such as Greece, which faced heightened debt challenges. By mitigating market fragmentation and ensuring liquidity, the PEPP helped to maintain financial stability across the eurozone. Through the duration of the program, there was a shift from market stability, to fighting inflation. Early evaluations highlighted its role in containing sovereign yield spreads and providing a buffer against the economic downturn. The program was designed to continue until EU governments determined that the COVID-19 period of economic crisis subsided. With this, the EU Governing Council ceased purchases in March 2022, giving the program a two-year active run.
Post-Pandemic Impact