What Comes Next?

BIS Working Papers  |  No 898  | 
02 November 2020



The Covid recession has had profoundly uneven effects at an industry level. Although some industries have recovered quickly since the middle of the year, customer service industries could face ongoing constraints until a vaccine or effective treatment for the virus becomes widely available. The quantitative implications of these constraints for other industries and for aggregate GDP are uncertain.


I use a multi-industry macroeconomic model to estimate the aggregate and industry-specific disturbances that explain economic activity in a number of large economies during the Covid recession. I then use the model to forecast the recovery under various assumptions about how these disturbances evolve. I model the Covid crisis as a sequence of structural changes, meaning that I account for the effects of the crisis on the steady state of these economies, as well as the dynamic relationships between economic variables.


The output of customer service industries in large advanced economies, like the United States and the euro area, could remain 10% below its pre-Covid trend until constraints on these industries ease. These economies could face a '98% economy' in the years ahead, with output returning to at best 2% below its pre-crisis trend. At an industry level, the model's projections for Chinese economy are qualitatively similar to those of the advanced economies, although aggregate GDP in China is projected to return close to its pre-Covid trend more quickly.


The Covid crisis prompted an unprecedented global economic contraction. Although the worst is likely behind us, the recovery is likely to be uneven, with economic activity in many customer-facing service industries set to remain constrained for some time. I use a quantitative multi-industry model to estimate the economic forces that explain the decline in economic activity in the United States, the Euro Area, Japan and China in the first half of 2020. I then use the model to project the trajectory of the economic recovery. I find that the US, EA and Japan will each face a '98% economy' if half of the constraints faced by customer-facing service industries in the first half of 2020 persist. The economic recovery in China is projected to occur more quickly.

Online appendix

JEL Classification: C32, E60, E170

Keywords: structural change, macroeconomic outlook, model projection