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.
The negative risks to economic performance appear to be mounting:
- Inflation and interest rates are moving higher
- Output and consumption are being squeezed
- Trade and real investment are under negative pressures
- Real incomes and household and business confidence are falling
- Financial assets are weakening, and debt risks are increasing
Add in the uncertain political and social climate and it is easy to see why commentators of all kinds are sounding more pessimistic about the outlook – from the IMF, the Federal Reserve and the Bank of England, to the main business and industry groups, and many academics. Despite an unusually tight labour market, reflecting some stark skills’ mismatches and gaps, fears of recession and higher prices abound. ‘Stagflation’ is said to be back (misery index into double figures in Q2), and supply chains are buckling from cost/price pressures in foods and fuels, pharmaceuticals and construction, and in transport, public and other services. The latest data on growth, especially retail sales volumes of goods, suggests a recession is nearer than we hoped, especially for items of discretionary spending.
At such times, it is important to address three issues: short term pressures and needs; long term trends and goals; and barriers to trade.
Short run factors were addressed partly by the Chancellor’s (£15bn) measures announced in late May to put extra tax on excess (“unearned”) profits in the energy sector in return for North Sea investment incentives, whilst subsidising household energy costs. Whether or not you agree with the Treasury’s particular actions, the key is that the distortions of policy and markets that have been introduced are indeed only short-lived and removed before the negative consequences on economic incentives become embedded.
Long run concerns are related to the Central Bank’s tightening monetary strategy and the government’s levelling up agenda. The former has some way to go - we all need to be prepared for base rates of 2.5-3.5% compared with 1% today. The latter is likely to be driven by (‘soft’ and technical) skills and innovation.
Soft skills include elements of resilience and employability, whilst technical skills can be professional or technological. The skills agenda is about business and societal demand and how this relates to employer and educational supply: academic study, training and apprenticeships. It is about removing barriers to learning through local partnerships (HE, FE, local authorities, LEPs, Housing Associations et al) for provision.
Hopefully, the innovation agenda will be refocused on improving sustainability and removing market failures. In the times ahead, firms will face more disclosure requirements on environmental risks whilst state policy may shift to tax “stuff” and the de-carbonising of externalities more than services and labour. Such changes will be dynamic and non-linear, fostering high growth for the ‘winners’ and hurting the laggards. Accordingly, there may be more emphasis on broad balance sheet and distribution issues as well as wealth and asset price effects. This will probably mean more attention to the building of natural and human capital relative to physical and financial capital. For professional economists, policy makers and development specialists, it may mean less emphasis on traditional macro growth modelling and more on sustainable valuation.
Finally, barriers to trade need to be minimised and mitigated with like-minded competitors (firms and countries) where economics is based on open markets, mutual trust and the rule of law. Whilst ‘full blown’ globalisation may be largely ‘dead’ for a generation, there is still a role for collaboration and co-operation between competing firms and governments. Moreover, this needs to be based on full carbon-accounting and environmental energy and logistics. Solving the Northern Ireland protocol issues on trade barriers would be a welcome first step to opening trade negotiations and agreements with a range of ‘friends’. There is also a local dimension to this, recognising the comparative value of secure, local supply chains and demand patterns over vulnerable and environmentally damaging long lines of trade.
In the first half of 2022, the main economic outcomes have been less buoyant than hoped, partly because of the ‘shock’ of the Russo-Ukrainian war and its impact on already stretched quantities and prices. In the second half of 2022, the outlook looks even more constrained, with a period of worsening ‘stagflation’. At such times, business, household and policy attention to both short-term and long-term barriers to development become even more vital. Prepare for near term damage but balance that with plans for investment in positive structural changes and eventual recovery.