quarter, uk gdp will still be around 12 % below its level at the end of 2019, a huge shortfall. the impact has been synchronised across economies – the similarities of this shock far exceed the differences in terms of economic impact. that said, within economies – the uk included – the impact of covid has been highly uneven across sectors. those that conduct activity involving large amounts of close human contact have obviously been most seriously affected. i would add that this has led to other notably uneven and unequal effects, because these sectors tend to have higher proportions of low paid workers, female workers, and there is a concentration by ethnicity as well. this is an issue the resolution foundation has done some commendable work on ( cominetti et al, 2021 ). a common question that we ask about economic shocks is whether it is a demand or supply shock. as monetary policymakers we ask this question with good reason – the identification of shock type matters for all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice the impact on spare capacity and inflation. so, what is the answer for covid? the answer appears to us to be both : demand and supply. this is not surprising – shutting large parts of the economy down to protect against infection affects both demand and supply. but this is highly relevant to the task of getting over covid, and for monetary policy. let me try to illustrate the nature of the covid shock through the lens of aggregate demand and supply. the first point to make is that illustrating the shock through a calculation of the output gap alone isn ’ t very helpful, precisely because it is the net of two shocks. in chart 1 i have therefore shown the historical path of aggregate demand ( gdp ) and supply ( potential output ) over the last twenty years, consistent with past mpc forecasts. i would caution against over - interpreting the detail of this chart, as there are several ways to represent aggregate supply and demand, and thus the output gap. but, detail notwithstanding, it is clear that while a gap has opened up between demand and supply during the covid pandemic, the overwhelming feature is the coincident hit to both demand and supply. that stands in marked contrast to the more pronounced impact on demand following the global financial crisis, and persistent period of spare capacity thereafter. as well as the covid shock, the behaviour of supply and demand also reflects

that i see reasons to believe that the longer - term negative economic effects of the covid shock will be smaller than we have seen in the past, particularly in the 1980s and early 1990s. as i described earlier, it seems likely that task and job reallocation and capital redeployment has increased since then, for instance because workers will need less significant retraining to move between sectors. in our assessment, the supply capacity of the economy is expected to be around 1¾ % lower than it otherwise would have been in the absence of covid by the end of our forecast period. but, of course, there are risks on both sides of this assessment. the third point is that, although those sectors which are growing may require new capital, elevated uncertainty is expected to continue to reduce investment other things equal, weighing on the capital stock and productivity growth. i have just used the phrase “ other things equal ” to describe the likely path of investment. however other things ought not to be equal going forward in my view. i mentioned earlier that we have had a decade or more of slower growth and weaker productivity growth. and, as chart 5 shows, although business investment did recover from a low base following the global financial crisis, it too was weak in the period prior to the covid pandemic. this was only partially offset by growth in government investment, which has also generally been weak over the same period ( chart 6 ). the effect of this weakness in investment can also be seen by looking at capital services – a measure of the value of the flow of services which are derived from the capital stock, including machinery, equipment, software, structures, and land improvements. this may better capture the drivers of supply growth than looking at growth in investment alone. 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