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.
After the relaxation of many pandemic rules, the UK economy bounced up by 4.8% in Q2 2021. The uptick was led by consumer services, including hospitality and leisure, as well as some construction and production. Many households were consuming more and government spending was robust. In contrast, corporates remained cautious. Business investment was constrained and inventories volatile. There was some rebound in exports and imports but not back to pre-Brexit levels. National output was still 4.4% below its previous peak (Q4 2019).
As the recovery gets underway, spare capacity is being used up. Already, firms are talking about materials and components shortages, and labour mismatches. There are important, specific skill gaps, such as for truck drivers. Companies report recruitment difficulties in filling vacancies, especially for areas that, pre-Brexit, used to be filled by overseas applicants, (e.g. in construction and hoteliers). Some strong earnings growth is apparent where shortages exist and some consumer prices have leapt higher. Also, there is a tight housing market (high prices and transactions), with people adjusting to their high savings of liquid funds, post-lockdown demand for more space, and short-term stamp duty incentives. Finally, there are risks that values in some major asset categories are getting overblown, (e.g. US equities).
Many of these patterns seem to be persisting in Q3, putting upward pressure on prices. In the short-term, this is led by international commodities and components, exacerbated by shipping and port disruptions. Then, there are several key supply/demand dislocations and shortages, (such as for some foods and some DIY/repair products). Import prices are up 10% or so and producer prices about 5% (year to July). Recorded consumer prices are around target (2.1% CPIH, year on year) but this probably underestimates the forces at work. Even the Bank of England expects 4%+ by year end. The MPC sees most 2021/22 price increases as transitory, looking for inflation to return to target (2%) by 2023/24. Given the rapid monetary growth rates, and earnings and materials rises, this may prove hopeful.
What does all this mean for the Autumn and Winter ahead? With business and households still cautious, given worries about Covid variants and the removal of government support schemes, growth will be positive but insecure. Globally, there are signs of more subdued growth (after the initial bounce from 2020) in China and the EU and there are fears of an inventory overshoot in North America. Simply put, there is a lot of uncertainty, confidence is fragile, and market disruptions may be evident in the months ahead. Even if the headline changes look good, the underlying structures and trends appear precarious.
Ready for the Twenties
As well as the cyclical factors exaggerated by the pandemic, there are some major structural adjustments to make for the medium term. Post-Brexit trade deals and barriers are one area of concern. The need to re-orientate investment in energy, transport, technology, and skills, with a view towards limiting climate change, is another.
The twentieth century economy was built on fossil fuels, specialisation of labour and productive and technical efficiency. ‘Globalisation’ brought benefits in terms of market openings, higher incomes and living standards for many people across the world. The full costs of those processes, however, were not immediately borne by those who gained, especially regarding environmental externalities. Ahead of November’s COP26 climate change conference in Glasgow, we need to think carefully about the “what, why and how” of economic development as well as specific measures to reduce harmful emissions, stabilise biodiversity and prevent floods, fires and other extreme weather dangers.
A lot has been gained by the pursuit of narrowly defined economic efficiency through the profit motive. Profit acts as a measurable proxy for value giving a signal to investors, firms, and workers as to where to deploy scarce resources. It has become clear, however, that such measurements are imperfect, ignoring some accumulated costs that now threaten true global efficiency. We need to reconsider what it is we value and how we calculate its worth. What is sustainable economic performance?
This needs a reappraisal of why we do what we do and who we do it for. For example, how much do we factor in distributions of intergenerational wealth and asset holdings, especially regarding environmental biodiversity, climate costs and natural resource use? We need to reconsider why we live the way we do and to what end. What are sustainable living standards for the decades ahead?
These ‘what and why’ questions naturally lead us to consider how we will achieve our new goals and aspirations. Resource allocation, (i.e. economics), remains fundamental to such choice decisions at all levels (individual, household and corporate, and community, regional, national and global). How do we get from where we are and where we are heading to where we want, indeed need, to be?
Economics optimises “objective functions subject to constraints”. A re-appraisal of what those objective functions are, beyond the traditions of global capitalism, seems warranted. In general terms, we probably want to “optimise individual and social well-being subject to environmental and other resource constraints”. How we break down such functions into specific areas of sector or market detail is crucial.
Simplistic hooks like traditionally measured profits and financial cost efficiency need to be broadened to include real values over time, including ecological conservation and health. Thereby, we may find better and safer ways to live together on this one and only planet.