Why didn’t economic output fall even further during the COVID-19 pandemic?

By Janice Eberly, Jonathan Haskel and Paul Mizen

When governments introduced lockdowns in 2020, many workplaces closed almost overnight. Offices emptied, businesses paused operations, and millions of people began working from home. Given the scale of these disruptions, economists expected an unprecedented fall in economic output.

Output did fall sharply. We measure this fall in log points, which can be thought of as comparable to a percentage. Between the first and second quarters of 2020, GDP declined by an average of around 12 log points across thirteen countries including the United States, the United Kingdom, Spain, France, Italy, Germany and Japan. But our new ESCoE discussion paper suggests that the decline could have been substantially larger.

The reason lies in what we describe as “potential capital”: the equipment, technology and infrastructure that allowed people to continue producing goods and services from home.

What is “potential capital”?

Traditionally, economists think of productive capital as the machinery, buildings and equipment used in workplaces. During the pandemic, however, homes also became places of production.

Potential capital includes home office space, computers, broadband internet connections and digital communication technologies. Combined with labour, these resources enabled many workers to continue carrying out their jobs despite widespread workplace closures. 

Since much of the workforce was working from home, there was a fall in hours at the workplace of around 24 log points from 2020Q1 to 2020Q2 (an unweighted average in the thirteen countries we examined). This should have resulted in a fall in output of 16 log points, but the actual decline was only 12 log points.

Using data on labour hours and energy use, we estimate that while output produced in conventional workplaces fell dramatically during the early stages of the pandemic, production from homes partly compensated for those losses. Potential capital alongside labour working from home helped to offset the expected decline in output due to low workplace labour and capital utilisation rates. This explains why output did not fall as much as it might have done: production was buffered by use of capital and labour at home.

Technology helped make economies more resilient

Not every industry was equally well placed to make the transition to remote working.

Industries that had invested more heavily in ICT before the pandemic were able to shift a greater share of their workforce to home working once restrictions were introduced. Existing digital infrastructure therefore acted as a form of economic resilience, allowing production to continue when access to workplaces was limited. Our estimates suggest that this technological resilience accounted for between 8 and 14 log points of GDP at the lowest point of the COVID-19 recession. Without widespread internet access, home computing and video conferencing technologies, the economic impact of lockdowns could have been considerably more severe.

What does this mean for the future of work?

The pandemic demonstrated that many jobs can be carried out effectively away from the traditional workplace. An important question is whether this change was temporary or represents a longer-term shift in how work is organised.

The extent of remote working will continue to depend on the costs and benefits of working from home compared with working in shared workplaces. However, our findings indicate that investments in digital technologies have lasting value beyond improving day-to-day productivity. They can also strengthen the ability of businesses and economies to adapt when unexpected disruptions occur.

Summary

The COVID-19 pandemic triggered a sharp fall in economic activity, but the decline was smaller than many economists expected. This blog explores new research showing how “potential capital” (including home offices, computers and digital technologies) enabled millions of people to continue working from home, helping to sustain output during lockdowns. The findings highlight the importance of digital infrastructure in improving economic resilience and offer insights into the future of work.

ESCoE blogs are published to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of ESCoE, its partner institutions or the Office for National Statistics.