Covid-19: Industry Level Origins of Fluctuations in Growth Rates and Economic Welfare

The impact of the COVID-19 shock on the UK economy has been heterogeneous across sectors, suggestive of significant reallocation as the economy recovers. Government support for the economy will therefore need to be targeted at specific sectors in order to be effective. We can observe sector-level stock prices and dividends, and estimate wages, but cannot observe directly how expectations of their long-run growth rates and sector sizes have shifted in response to the COVID-19 shock. However, using an asset pricing theory model (based on an extension of work by one of the applicants [Bhamra, Kuehn and Strebulaev (2011)] we can use sector-level stock prices and dividends and wages to derive equations linking these variables to expected long- run growth rates of dividends and wages across sectors. We can hence estimate sector-level expected long-run growth rates and show how they have changed in response to the COVID-19 shock. We can also estimate the contribution of each sector to aggregate welfare in terms of labour income and consumption and show how these contributions have changed over time. By basing our analysis on asset prices, we can update our estimates of sector-level growth rates In real time. This is important, because sector-level macroeconomic data often lags events (e.g., UK sector-level data on output for February 2020 was released by the ONS on 9th April 2020). Existing work has exploited asset prices to estimate aggregate growth rates for the US [see Gormsen & Koijen (2020)], but no such work exists at the sectoral level.