In an earlier article, we discussed the fallout from the current crisis and argued that it will take time to ‘return to normal’.
But the scale and nature of the shock means that this ‘new normal’ might look quite different in a number of ways.
In the months to come, we’ll be looking at how different aspects of our economy could be impacted by recent events. This blog provides a brief overview of some of the areas that we will explore.
It goes without saying that the underlying structure of our economy could look very different when we emerge from the current crisis. As we discussed in our March Commentary, some business models – and regions of our economy – are particularly exposed to the major shake-outs in economic activity that we are seeing.
Within this, certain parts of the core structural make-up of the Scottish economy face major challenges. We reported some of the sectoral impacts seen so far in this article using results from our Scottish Business Monitor. The costs facing Scotland’s tourism industry are huge, with many businesses facing the loss of an entire annual visitor season. Scotland’s oil and gas sector, just coming out of its last crisis just five years ago, faces a near perfect demand and supply storm. With oil trading at just under $30 a barrel, the tipping point for the viability of many fields – both now and in the future – has been breached.
But we need to be open to the opportunities that might follow this crisis, what new businesses might rise up and go on to drive growth in the future?
Already there have been discussions about the need for an ‘inclusive’ recovery, one that helps to ensure that the distribution of growth in the future is more evenly shared across society.
But is all of this talk of radical changes in the make-up of our economy overblown? Once the immediate emergency passes, might we return to business-as-usual after a period of cyclical adjustment?
The nature of our business base in Scotland (and the UK) could look quite different. Sadly, and as the Chancellor acknowledged, even with unprecedented government support, not every business will make it through to the other side of this. But some will come out of this stronger, perhaps with fewer competitors and greater market share. Expect too a raft of mergers and acquisitions. All of this poses questions for our regulators, particularly in new areas of our economy, such as in the digital marketplaces many of us have come to depend upon where rules and regulations are much less defined.
What about the businesses that remain? Day-to-day ways of operating will look radically different for many. The gradual decline of traditional retail and casual dining– with knock-on implications for our city and town centres – may have been hastened that bit quicker with the exponential rise of online sales. Even in our own university sector, many who are reliant upon overseas students coming to study here, will be in for a sharp shock. How many students will return in the future and when? What will be the knock-on implications for research and the wider city economies (such as the rapid growth in student accommodation across Scotland)?
The nature of our labour market too will look quite different. An obvious immediate priority has been to project what jobs we can and to avoid – where possible – hysteresis effects. But like with businesses, unfortunately not everyone will be shielded from unemployment or financial hardship. The OBR’s forecast of a rise in unemployment to 10% would be equivalent to an extra 180,000 people unemployed in Scotland (in the short-term). As always, it is likely to be the young and those in lower skilled jobs who suffer most and most quickly when unemployment spikes. What prompt action/active labour market policies are needed to support these individuals and who and what do we prioritise when the country re-opens?
For those lucky enough to remain in work, many of us have become accustomed to greater flexible and remote working. But what are the long-term implications of this? Is this a ‘new normal’? And if so, what about wellbeing, and fair work practices, in these new working environments? Might there be opportunities, including greater acceptance of the need for work-life-balance and mixing caring and work responsibilities together? But what are the risks too, particularly around mental health, isolation and social interaction? Might the move to greater ‘home-working’ have knock-on implications too for sectors such as real estate (with reduced demand for office space) or public transport (with reduced demands on commuting)?
One particular aspect of the labour market, is the links to human capital (and wider productivity). One of the unfortunate – but necessary – consequences of the emergency shutdown of many aspects of our day-to-day society as we moved to social distancing was the closure of schools, colleges and education. Many young people in particular will have been impacted by this outcome. Ensuring that schooling and wider investments in human capital are not lost (or are recouped) will be important not just for the individuals involved, but also our long-term productivity.
And in relation to productivity more generally, how might this crisis impact upon Scotland’s underlying productivity capacity? On the one hand this crisis has forced business to seek new ways of working and embrace technology at a rapid rate, while the assets of those businesses that do not survive this crisis will be released and reallocated to firms that do make it through. Both of these should (!) help boost aggregate productivity in due course (but at a cost). On the other hand, the fragile nature of demand in the economy as we emerge from this crisis, and the possibility of a second wave of the pandemic (and indeed future pandemics), may reduce the appetite that firms and investors have for risk and in turn innovation for some time yet. This will hold back productivity growth.
How might all of this impact upon our ability to tackle wider objectives, such as climate change? On the one hand, reductions in industrial and transportation activity should reduce emissions in the short-term. Cheaper oil prices will make it harder for the dirtiest oil to compete. However, much of this will be temporary. If resources – both public and private – are diverted from climate action to repairing the economy and government indebtedness, might the world’s clean energy transition be blown off course?
As we discussed in an earlier blog, the ability of our economy to respond to global risks – such as global public health – has been harshly exposed in recent weeks. What lessons can we learn from this to improve our resilience over time (both at a macro level but also within households and businesses)? How are such questions linked to the economy that we have built in recent years, with globalisation at its heart, long-supply chains, and the offshoring of much of our core manufacturing capacity? How do we price-in risk to all our future business and government procurement decisions so that we’re no longer defining value with the lowest possible price tag? What can we do to encourage (and support) households to save more?
What about asset values? Stock markets have fallen up to 30%, and will take a long-time to recover as financial markets unpick what’s left and businesses themselves look to repair their balance sheets. The implications for those relying upon investments for pension pots and annuities will see their value of their investments fall sharply, with knock-on impacts for the welfare system.
In responding to these risks, the UK Government has – quite rightly – thrown the kitchen sink at protecting businesses, jobs and families at the current time. But the fiscal costs are huge. The OBR predict that the measures announced so far by the UK Government require a £218 billion increase in borrowing, equivalent to around 11% of GDP. And this assumes that these additional measures only last for three months – an (overly?) optimistic scenario. A sharp rise in debt-to-GDP is now inevitable. How will this be paid back? Or will we be happy to carry a higher debt burden for much longer (presuming of course that the bond market allows us this luxury)? A decade of fiscal consolidation has meant that the UK fiscal balance has improved dramatically in recent years. But going forward a route will have to be found to start paying back the unprecedented sums spent over the past weeks. Restoring a growing economy will clearly be key. But government spending and tax rises are likely to have to play a part too. Might this hasten proper discussion about what services to prioritise in an age of demographic change and unsustainable demand for certain public services?
What about young people? Some young people entering the labour market post-2008 (now in their late 20s or early 30s) have known little else other than a fragile economy, austerity and weak growth in wages. Once again, it will be this generation that picks-up the tab for rebuilding after this crisis, raising once more questions around intergenerational equity. How might we support them, both financially and their overall wellbeing, in the tough adjustment to come?
More generally, major questions arise now about the relationship between the state, the private sector and the labour market. No doubt there are many that will be relaxed about a return to the way things were before. Some people will be in jobs that have been relatively unaffected by the crisis, and others have been scooped up in the additional support provided by government and will be able to go back to their jobs once the economy restarts. Others have not been so lucky, with a million already in the queue to receive Universal Credit and reports of many more who have been able to apply for even this bare minimum of support. As the government support measures are unwound we may see a second wave of unemployment as firms realise they can’t take back all furloughed staff.
This is a good tome to re-examine who should ultimately hold financial risk, not just in times of crisis but also in times of stability. The labour market will not always provide appropriate jobs to those who need them. If we didn’t know that before, we certainly do now. This means we may need to look again at the role and scope of welfare state (including ideas such as basic income) and the role of employers, for example in the gig economy and in contributing appropriately to the wellbeing of its workers – potentially mandated by greater contributions to the state or conditions set on any future government support.
During this crisis the government has rightly put public health before profit. The public health impact of poor-quality work and poverty is not reported in daily hospital statistics, but it’s impact should not be understated. What too the role of public sector employment? In recent years, some aspects of the public sector have faced a major squeeze on wages and employment levels, but in others – such as the civil service – pay has risen and jobs have been protected. These issues, such as the low pay of many health and social care staff, will be more difficult to avoid in future pay discussions, and there may need to be some re-evaluating of the value of other public sector jobs as a result.
These are just the start of some major questions that we’ll have to tackle in the coming months and years. We’re very much open to ideas to work on, so please do get in touch.