BU's Emeritus Professor Nigel Jump writes the next in a series of economic blogs looking at the impact of covid-19 on the economy.
This is the last, for 2020, of these Dorset Economic blogs written during one of the worst economic crises of modern history. Hopefully, the range of topics has been interesting and useful (see summary list of previous ones at the end of this blog).
Ahead of Christmas, the BCP and Dorset economy is struggling with its Tier 2 designation that allows most businesses to operate but confronts many with restrictions to prevent the spread of the virus in social/group situations. This is especially true for the many hospitality and leisure venues that are important for incomes and jobs in Dorset. The negative impact of tiering on consumer and household demand is a clear constraint on sales volumes and profits for some, although others are booming, particularly pre-Christmas. There is also a negative effect through the lower hours and earnings of workers, the ‘forced’ savings of many residents, and the wider reluctance to engage with others. There is an impact of higher unemployment on the demand for services and goods, as well as constraints on business-to-business supply chains across industry. These ‘negatives’ are obviously offset by the net “saving” of human life and health, effectively an “investment” in future capacity, demand and supply, and overall well-being. We must hope that economic activity is delayed rather than lost.
The strategy is some economic ‘pain’ now for more ‘gain’ later: a subdued winter to get on top of disease transmission and virulence should allow a stronger and more sustained recovery when vaccination, test and trace, and social distancing bear fruit. The pessimistic risk is that capacity and resources are lost (some permanently) during the period of restraint, which weakens any rebound and long-term growth potential. The optimistic risk is that pent up and replacement demand kicks in sharply once health risks ease and accumulated savings are released. Hopefully, this boosts growth before government attempts to control public borrowing and debts through higher taxes and lower spending. It is important to recognise that it is not a case of the economy OR the pandemic. Mastering the pandemic is a prerequisite for a sustained recovery.
The likelihood, then, is for subdued growth, at best, over the next few months followed by a recovery through the middle and second half of 2021. There are uncertainties on either side of that central view but, until the global pandemic is really under control, the bias is negative – not least because the UK is also entering a period of self-imposed trade restraint (over and above an already tight global perspective) as a result of leaving the EU without a strong trade deal.
International trade is an important component of economic growth, but it seems likely to become less of a driver than we were used to in the mid-late 20th century. After the global financial crisis (2008+) and its aftermath in the 2010s, the positive contribution of trade was already waning, especially when China’s period of rapid development started to lose momentum. The Covid19 pandemic, and the policies adopted to address it, only increase this tendency towards a slowing of world trade.
One of the basic tenets of economics is that international trade and exchange has been good for growth and living standards, (especially since the 18th/19th century agrarian and industrial revolutions). Specialisation has increased efficiency, raised value, and stimulated volumes, whilst releasing (capital and labour) resources for allocation into new and productive activities. For most of the second half of the 20th century, the world economy grew bigger and better, driven significantly by more trade and exchange. Rapid increases in international trade volumes allowed many more people to escape poverty, reflecting the higher productivity of greater specialisation. For economists, ‘globalisation’ proved that shifts to freer trade are not a Mercantilist ‘zero-sum’ game but a Ricardian net benefit for all.
To some, however, recent performance and events suggest ‘globalisation’ may have gone too far. The unrelenting pursuit of ‘just-in-time’ efficiency of production and distribution has exposed issues of environmental sustainability, local economic resilience and some issues of job security. Global supply chains have been disrupted by the pandemic, raising the appeal of ‘just in case’ stockpiling. This may encourage a higher share for domestic production and consumption. Climate change and political populism have promoted a reappraisal of the efficacy of trade, particularly in the west, undermining some of the support for global co-operation, especially in the face of China’s “planned and interventionist” brand of capitalism.
Whether these downward pressures on the contribution of international trade are near-term ‘fashions’ or long-term ‘assumptions’ is critical for the post-pandemic ‘new world order’. Ideally, the future should be based on mutual co-operation and trust leading to a competitive but beneficial acceptance of a multilateral ‘free trade’ model that is environmentally sustainable.
At the end of 2020, however, it is difficult to be optimistic about that. Global institutions that monitor, regulate and maintain the trading systems are under threat (WTO, IMF, financiers etc), partly because they are viewed as having grown “fat and lazy”, and partly because their roles are not as appreciated by autocratic and populist regimes.
President-elect Biden is unlikely to reverse ‘America First’ completely and to return America to its former free trade bias.
China, Russia and others are unlikely to endorse an unreformed ‘Washington-consensus’ world view.
The EU is vulnerable (through its weaker members) to a range of adverse financial, migration and other economic trends (e.g. currency pressures and high public debts).
The post-Brexit UK-EU trade relationship will be weaker and more disruptive. UK output will drop (trade barriers) and prices will rise (tariffs and exchange rates) compared with what might have been.
The risk to the UK union, threatening other new trade barriers, is stronger than it’s been for centuries.
Whether or not there is a minimalist UK-EU trade deal (not resolved at the time of writing), much stickier trade and exchange with European countries than we are used to will emerge. This may be particularly restrictive for a Channel county like Dorset. Tighter regulations and higher tariffs will impose extra costs on Dorset businesses and those supplying or trading through local companies. Routes from the Poole and Weymouth ports, Bournemouth airport and the cross-Channel two-way flow of tourists and other travellers face increased barriers. Amongst many other sectors, such trade barriers will affect local key industries, including tourism and leisure, agriculture and marine, aerospace and financial services, and other manufacturers and services. Local businesses will adapt to new trade regimens in time. Meanwhile, however, there is a permanent loss of output, jobs and investment, as well as convenience, as trade and other cross-border laws become tighter. There is a price to pay in terms of growth potential whenever trade restrictions and costs increase. Time will tell whether it’s worth it for other “values” such as sovereignty.
The main economic activities expected to be affected under ’deal or no deal’ are:
- Those affected by a fall in the currency (importers versus exporters)
- Financial sector – office, staff and market departures over time
- Trucking delays for goods (imports and exports), especially perishables
- Travel delays/costs for tourists and other visitors, such as issues over personal health, transport and insurance cover
- Medical and pharmaceutical, and higher food prices and some shortages and delays
- Scarce components and reduced investment in motors and other manufacturing and engineering sectors
- Less engagement in the development and dissemination of new technologies, such as exclusion from R&D programmes, such as Horizon and Erasmus.
- Reduced inflows of foreign students and academics, and of key workers for many sectors, including health and agriculture.
Until business, markets and consumer confidence rebound, which does not appear imminent, growth rates will suffer. UK business investment has not recovered at all from the first lockdown and not everyone is ready for any new trade barriers. These restraints may restrict inward investment for years, limiting UK growth potential and performance compared with what might have been. At present, the aftermath of the pandemic seems likely to be contractionary, inflationary, debt constrained and bound by low productivity. In the short term (2021), the sub-optimal end (from a trade perspective) of the Brexit transition has been estimated to take at least 1% off UK growth performance. With a deal, the OBR says it could take 4% off GDP over time. No deal adds another -2% to that loss. These outcomes would mean significant decreases for incomes, profits and jobs.
There may be some grounds for longer-term optimism, however. Technology, skills, entrepreneurship and innovation can still deliver solutions and ‘new growth’. The political and social response to the current crises can be supportive and the economic and environmental response can be positive. From an immediate perspective, it is hard to predict the looked-for dynamic future led by strong investment in the higher productivity of people, processes and techniques. Human beings, however, can be resilient, unselfish, and inventive. Government, agencies and business would do well to incentivise the making of “Global Britain” into an entrepreneurial reality.
So, here’s a few timeless mantras for the 2020s:
- Co-operate to compete – share best practice, allow markets to foster productivity-based success without exploitation, and ‘zombies’ to fail.
- Do things better and do better things – lessen barriers to sound ideas and behaviours, and create infrastructure and market incentives for efficient ‘green’ growth.
- Do unto others as you would have them do unto yourself – build trust and fairness by agreeing and adopting sound fiscal, monetary and regulatory regimes as well as bolstering multilateral self-interest and incentives amongst the local and international business community.
Meanwhile, Merry Christmas everyone and here’s hoping for a happier, safer … and more prosperous New Year.
Summary of Blogs in this series to date:
Blog 1: The Lockdown Recession. Consideration of current data trends, questions to be resolved by forecasters, and future planning by businesses and policy makers.
Blog 2: The Lockdown Recovery. Behavioural and policy influences on the future shape (V, U, L, W curves) of any recovery.
Blog 3: Policy and Recovery. The Treasury’s fiscal measures and five key risks to their success in influencing demand and supply and, thereby, the path of growth.
Blog 4: Impact and Strategy. The local economic structure and local strategies for future development.
Blog 5: Money and Finance. The role and influence of financial matters on the current situation and outlook.
Blog 6: Regional Development. Local priorities for economic success – a) boosting skills, natural capital and productivity and b) exposing and addressing deficiencies, opportunities and incentives.
Blog 7: Supply and Demand. The medium-term requirement to switch from demand side stimulus to supply side investment.
Blog 8: Values and Aims. What do we want Dorset to look like in the medium/long term and what aspects of the local economy need to be improved to bring it about?
Blog 9: Socio-Economic Inequality and State Engagement. How the pandemic and other changes may affect inequality and the future role of the state.
Blog 10: Productivity and the Spending Review. How does the latest spending review fit with the UK’s productivity dilemma.