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.
We enter 2021 in a parlous state economically: with
- extremely low growth and inflation;
- very high un/under employment and public debts; and
- great uncertainty about the future path of industries, incomes and well-being.
In this post-Brexit world, even if the deal is better than no deal, the pandemic finds us in what has been described as an “illusion drenched in nostalgia”. Unless entrepreneurial spirits identify new opportunities quickly and until public and private sectors work together to invest in skills, capacity and innovation, welcome to a poorer Britain than might have been expected a few years ago.
There is hope in the prospects of vaccinations that tame the pandemic and allow the release of built-up savings into expenditure. There is risk, however, in the unpredictability of trade and other relationships across and along supply chains - and in the likely course of household and corporate demand: consumption and investment.
Under the Brexit trade deal, the UK has left the EU’s single market and the customs union. The deal avoids tariffs on goods but requires a new raft of paperwork from exporters and separates Northern Ireland. Moreover, it does not cover our services trade with Europe, notably financial services and many distribution functions. New arrangements and barriers for travel, trade, immigration and security co-operation are coming into force. The Brexit deal is thin, yet it drives a need for deep adjustments in the way competitive business and production are organised.
Longer term, the question is what form the ‘new world order’ takes and whether it achieves a sustained and sustainable recovery. Will we return to ‘normal’ or adopt new values and targets? In particular, how will we address the growth possibilities of climate change? There appear to be three broad, but not mutually exclusive, scenarios for an eventual UK economic recovery:
Stealth: security becomes a dominant driver of policy and popular value. The 2020 crisis teaches us that resilience is vital and ‘just in case’ domestic provision is, at least, as important as the efficiency of ‘just in time’ globalisation. Countries become more isolated and more inequality and stagnation may be risked as, on average, the rate of real GDP growth achieved stays lower than before.
Wealth: economic actors pursue a return to ‘normal’ as soon as possible, putting low priority on damage to the environment and future viability, and seeking current jobs at any cost. Short-termism means real GDP is stronger than in other scenarios, but the inequities exposed by the crises of 2008 and 2020 are unresolved, indeed they may have worsened.
Health: a “never again” reaction to the pandemic produces a strong change in popular and political values. Energy and natural resource transitions are pursued, and the economy turns greener. Social care is properly addressed and more training and education, especially for young people, is provided. Real GDP growth is middling but potentially spread ‘more fairly’ across the UK’s regions.
In practice, elements of each of these three scenarios are likely to occur. Whatever the eventual mix, it implies a rethinking of the value and values of the economy for individuals, workers, households, firms and industries. In the near term, this probably means a slow process of adjustment with the hope of a better future.
We could be approaching a turning point in which economic and environmental policy could be less about addressing ‘market failure’ and more about encouraging ‘dynamic change’. The relevant (economic and environmental) output and employment “multipliers” for growth can be encouraged to work together (at last) and excess savings (at ludicrously low interest rates) may be released to make “green and social” investment. To begin to pay down massive public debts, the priority needs to be on generating clean growth, rather than the severities of austerity, default or higher inflation.
Endogenous technological progress is the target, based on a policy with ‘green’ incentives and the creation of ‘new’ markets. We need to invest now in innovation and design that create products and services for a sustainable future. The emphasis should be on growth in value rather than growth in resource use. The goal becomes to avoid economic growth based on running down natural and social capital and to favour the building of human and physical capital (whilst anticipating risk management for resource stocks, such as fossil fuels, that will become worthless). Innovation in these areas of knowledge and technology can improve productivity and lead to better economic and environmental outcomes. Investment in natural capital, especially renewable stocks, (such as biodiversity and habitats), and in flows of environmental services, can yield new forms of sustainable regional development.
After the pandemic, it is to be hoped that technology, behaviour and policy will shift, indeed tip, through a ‘non-mean reverting supply shock’. This just means the pursuit of a structural change in economic goals and practices: a new economic revolution in activity and jobs rather than a return to previous ‘norms’.
Dorset firms need to anticipate the new growth potential by investing in new activities and markets. This can help solve challenges such as:
- the energy transition for local rural communities away from fossil fuels (oil, LPG gas etc) for heating and towards sustainable fuel sources
- the provision of effective and decent social and health care, and
- the creation of new, lower emission employment opportunities based on new skills.
Companies and businesses that evolve solutions for these and other areas of activity and need will be among the winners in the long-term recovery. Answering social and climate issues by increasing productivity, creating jobs and improving living standards and wider well-being, offer profitable opportunities for local and wider growth. The public agencies need to get on board with incentives for local firms to adapt, reform and innovate in this fashion.
So, here’s hoping for a happy and prosperous New Year for us all, based on a fundamental shift towards more sustainable value and values. Perhaps, we can use Lockdown 3 for some fundamental thinking about these futures.