What higher productivity looks like in a post-COVID world

Constance Hunter, chief economist and principal at KPMG, discusses the state of the U.S. economy and the impact of the pandemic on productivity.

Video Transcript

JULIE HYMAN: It is a relatively benign week on the economic reporting front, but we will get some PMI data coming in the latter half of the week. And as we know, there's a lot of anticipation for strong growth this year. Let's talk to Constance Hunter about that. She is KPMG chief economist.

Constance, it's always great to see you. You're looking for growth of at least 6.5% in GDP this year. And you know, there is an awful lot of ebullience out there when it comes to the forecasts. Do you see any threats at this point to that?

CONSTANCE HUNTER: Yes, I do. But before I address those, I just want to say that this is a normal response after a recession, right? We normally have the recession take away GDP, and then we have a period of time where that GDP bounces back. And it's, depending upon the drawdown, a pretty big bounce-back because you want to get back to where you were prior to the recession occurring and then you want to get to where the economy would have been had the recession never occurred, had we just continued chugging along at trend growth. So 6.5% sounds like a huge number, but let's not forget, we were down 3.5% last year. So that gets us back a little bit above where we would have been on a trend basis by the beginning of 2021, so just to put that in the overall context.

And then I do see some risks. I mean, obviously, the virus is the economy right now. And if we look not just in the US, but around the world, we see the virus really being pernicious, as it has been this entire past year plus, and really being very, very virulent. And so, of course, we have these new strains that are more resistant to the vaccines. We have rising cases in pockets of the US. We have rising cases in Europe, you look at South Asia.

And when we think about that, that really impacts the ability of the economy to boom because it impacts supply chains just at the very basic level, right? So we look at this shortage of semiconductors and how that's impacting the auto industry. We massive demand for cars right now, but there are supply constraints. So while it would be great if those supply constraints didn't exist, the fact is, the virus is still the arbiter of how fast we're going to grow until we get a handle on it completely.

BRIAN SOZZI: Constance, Coca-Cola mentioned in its earnings this morning they see an asynchronous recovery. What economies are you concerned about right now potentially recovering slower than others?

CONSTANCE HUNTER: Yeah. Well, the OECD did some great work to figure out the level of output gap. And so you look, India right now is estimated to have the largest in the world, but Brazil is going to have a significant output gap. I look at what's happening in Europe and what's happening with vaccine rollouts, and, you know, I think that Europe is looking at scarring that could last several years because it's just taking so long for their economies to get back online.

So really, it depends on vaccine rates and how fast we can get this distributed, right? So-- and even in Japan, where they opted to have additional trials of the vaccines, they have a very low vaccination rate, right? So it's really, really going to depend on how quickly-- I mean, the asynchronous economic recovery is based on the asynchronous vaccine distribution.

MYLES UDLAND: You know, Constance, you mentioned that we have that catch-up from, you know, the GDP loss in 2020, so the 6.5%, you know, number this year really just gets us back to trend. But as you look at the trends behind, let's say, the fiscal impulse here in the US, are you thinking about the possibility of a faster trend growth on the other side of the pandemic, as we get into the teeth of the 2020s?

CONSTANCE HUNTER: I am so glad you asked that question. Yes, I am. And I think what's interesting about the pandemic-- and if we look back in history at times where we've just had immense shocks to our economy-- and what comes to mind, of course, is World War II, which is the last time we had this much of a drag on GDP, these shocks can adversely impact large parts of the economy, but they also shock us into being more productive, right? So just the fact that we are all in our various locations getting on this Chimes call and-- I'm sorry, Google Hangouts call, I do so many of those-- these-- getting on this video technology and being able to do this live TV program.

The pandemic has shocked the diffusion of technology around the economy in a multitude of ways. So even just using the RNA technology to develop the vaccine and streamlining the FDA approval process, we're never going to go back to the old way of doing FDA approvals. And so there are many things in what's happened because of the virus and the shocks that it's caused that I think are going to cause us to have higher productivity for several years after this.

And then, of course, the lack of scarring because of the very targeted fiscal stimulus-- I mean, we actually have delinquencies down during a major recession. That's unheard of. But it limits the contagion impacts of that recession throughout the economy. It limits the scarring. It allows us to recover more quickly, which it then allows us to have higher potential GDP going forward because it will likely promote more investment, which will then, in turn, promote more productivity.

JULIE HYMAN: Constance, just a quick follow-up on the productivity question, we have had low productivity for so long. What does-- in practical terms, what does higher productivity look like?

CONSTANCE HUNTER: So from a numbers perspective, we were at about 1.5% for the preceding 15 years or so. We're looking for something more on the order of 2% to 2.25%. And, of course, compounded over a decade or so, that's going to make a big difference. And what it looks like is that we are able to grow at a faster rate without igniting inflation. Because, of course, that is the big question, right?

You have this big turnaround in growth. You have all this fiscal assistance. You have monetary assistance. Are you going to see inflation that gets out of control? And the thing that helps prevent that is higher productivity, and higher productivity usually is the thing that causes firms to be willing to pay higher wages. And of course, those are higher real wages.

And then what we get is-- generally speaking, with higher productivity-- a better distribution of GDP throughout the economy. It allows a broader swath of people to be able to build wealth and have higher incomes. And then, of course, it tends to improve living standards. So we expect this to have, really, a broad impact on the economy.

JULIE HYMAN: Yeah, and that would obviously be an improvement as well from what we've talked a lot about, the whole so-called K-shaped recovery. Constance, great to see you. Be well. Constance Hunter is KPMG chief economist.