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.
President Putin of Russia’s attack on Ukraine seems driven by a desire to reverse the fracture of the USSR and the expansion of NATO after the fall of the Berlin Wall. This has echoes of the 1930s, when Germany sought to change some of the outcomes of the first World War and the “diktat” of the Treaty of Versailles. There are a number of similarities between events before the second World War and now, not least comparing Putin’s move into Dombas with Hitler’s in Sudetenland.
In response to these military worries, the global economy, already vulnerable to the effects of the Covid19 pandemic, has taken another body blow, as reflected in this month’s weakness of global stock markets in the face of even more supply chain disruption.
Here, we must also recall the two recessions of the 1970s, (hopefully not the late 1920s-30s when the policy and the Great Crash of 1929 fostered the Great Depression). The 1970s was a period of low growth and high inflation, high unemployment and debt, and wide social unease. After the 3-day weeks (1973-4) and an IMF/UK debt crisis (1976), the 1970s erosion of living standards led to Reagan and Thatcher, with tight monetary policies restraining growth in order to squeeze out the inflation spiral. The subsequent world recovery (late 1980s-1990s), ironically boosted by the collapse of the USSR and the opening up of China, was a close-run thing. It could have gone a very different way with more state control of prices and production and a loss, instead of a win, in the ‘Cold War’. What now in the 2020s with Russia belligerent and China slowing down?
One key difference is the UK joined the EEC in 1973 whereas it left the EU in 2020. So, the emerging trade patterns are very different, especially against the background of a climate crisis. Recent data from Germany, for example, shows a huge fall in Anglo-German trade since Brexit. The recent recovery in German activity after the worst of the pandemic has not helped Britain. The UK is being left out of some European supply chains and, as yet, there is no sign of this being compensated for with higher trade outside Europe. After it joined the EEC, it took some years for the British economy to establish its competitiveness in the new bloc. Now, on leaving the EU, it would be surprising if the resulting changes in trade patterns did not also take quite a while to turn positive.
Right now, the UK economy (amongst others) is vulnerable to an erosion of household confidence (already apparent in the first third of this year - see ‘big ticket’ retail sales), defensive business planning and a restraint of international trade that is self-reinforcing. This could mean lower consumption and output - stifling productivity, profits and investment in a way that dampens innovation and entrepreneurship, whilst competitiveness suffers from skills shortages and gaps.
How do we avoid, mitigate or shorten this period of potential negativity? Knowing the risks exist and heading them off would be one way for ‘statespersons’ of noble stature to forge a positive path. This requires a degree of trust and honesty, between government and business and from local to national, that promotes some desirable steps:
1) Regain control of inflation through steadily higher interest rates (but not too high or too quick) and quantitative tightening. Witness the recent Fed Reserve 50bp hike in base interest rates and the Bank of England’s similar 25bp move. Still, with rates now only about 1%, central banks remain behind the curve: at least 2% seems likely by year end and that might well not be the end of the monetary tightening.
2) Win the war or at least make its costs unsupportable for Putin’s Russia, which would encourage the world’s tribal ‘non-democrats’ to re-open the key trade pathways in vital commodity markets.
3) Invest in basic research, new technologies and processes that develop efficient products and services, promote supply resilience and address energy efficiency and resource conservation.
4) Increase the skills base of the population, the community and the workers through private and public investment that moves more Dorset firms and employees from a low skill to a high skill equilibrium.
5) Focus on the local supply chains as well as new macro-ones outside Europe through effective partnerships and planning to boost entrepreneurship and competitiveness in novel technologies and markets.
6) Create a fiscal regime that supports business and household investment towards ‘clean’ growth.
All this is easy to say but difficult to achieve, especially quickly. It is, however, becoming increasingly essential to try moves in the ‘right’ direction. Otherwise, the risk of history repeating itself increases, politically, economically and socially. That way lies the potential for great pain and strife.