It shows a sharp decline following the collapse in investment during the global financial crisis, and a subsequent recovery, which flattened off as a result of the weak investment in the period prior to Covid (Chart 7). The Covid shock has been profound, and has required an increase in public and business debt to smooth the impact. This is a necessary and sensible response. It means that the economic impact of Covid will be spread over time – how long we don’t know because it is too early to predict. But that cost has to be managed, and it will be easier to do that with a higher trend rate of growth, boosted by stronger investment. Let me add that this investment is also needed to support the transition required by climate change and the necessity of enabling a more digital economy. These are challenges and opportunities. The message is simple: stronger growth in potential supply supported by stronger investment and productivity growth will make the Covid recovery easier. Monetary policy has a role to play here, in ensuring there is sufficient growth in demand to match any increase in potential supply growth. The MPC’s actions during the pandemic may also have helped reduce 7  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  7  the extent of scarring. The Bank’s Financial Policy Committee is also taking steps to ensure there is appropriate supply of finance for productive investment.
Smaller firms have been the most vulnerable to the shock and, despite the mitigating measures put in place, are more likely to be affected by solvency problems. Naturally, differences in credit risks across sectors of activity (besides the most directly affected sectors) and in the geographical distribution of the exposures may also contribute to the possible future heterogeneity of the impact of the crisis on banks. As regards the geographical aspect, the high impact of the pandemic in 2020 H1 in some foreign countries that are material to Spanish banks suggests that the benefits of geographical diversification could be lesser in this crisis than during the global financial crisis. However, the contribution of foreign business to Spanish banks’ return on ordinary activities increased in 2020 as a whole, and the growth in impairment allowances was relatively contained in various material countries. In any event, the potential uneven performance of the banking business in the different geographical areas needs to be monitored. Moreover, in view of the possible materialisation 9  Indeed, the distribution among banks of the percentage of credit exposure to the sectors hit hardest by the pandemic (e.g. hospitality and transportation and storage) is very concentrated, at values of close to 20%. 9  of permanent damage to some sectors of economic activity with asymmetric recovery paths, it is important to continue monitoring changes in credit quality.