Global Letter – Cold realities

Macro Series

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( 4 mins read )

Broader ramifications of COVID are set to come into sharper relief, not least in the UK.

Tough economic times coming

Commentary in today’s 24/7 news world tends to be intrinsically incremental. But step back and reflect, and it becomes clear that fundamental changes are afoot – with, in some countries at least, potentially dramatic social and political implications.

The true nature and extent of the present weakness of labour markets in OECD economies is about to be revealed, as temporary job support schemes are scaled back, and the number of people who have permanently lost their job, can work only part-time, or have left the workforce, becomes evident. Moreover, second waves of the pandemic and associated containment measures are already delivering further blows to business cash flows, employment, incomes, and confidence.

The impact is falling particularly heavily on the young; women; accommodation and food services, transportation, and retail and wholesale trading; those in already precarious jobs; and small and medium-sized companies. Regionally, the fallout is particularly heavy in some urban centres, not least those that have over the years already experienced considerable economic distress.

Demand will ultimately recover, at least when a vaccine finally arrives. But it always takes time for labour and capital to be redeployed. And structural reform programmes in most countries have generally lost momentum over recent years. Resource reallocation is hindered in many by inefficient bankruptcy processes, especially for SMEs, constraints on credit provision for start-ups, and education, training and re-training platforms inadequate for the needs of a changing world.

A significant portion of the unemployment and underemployment that has resulted from the pandemic will not dissipate rapidly and, to the extent that workers’ skills atrophy, or individuals become enduringly detached from the labour market, potential labour supply will fall, augmenting the demographically-driven burden on the declining proportion of the population with jobs.

Social and economic consequences

These developments will surely spill over into wider social and political conditions. Economic growth potential in the major economies has been trending down for decades, and now stands to decline further. In such an environment, poverty is almost certain to increase. Other inequalities of access to education, housing, transport, education, health services – seem bound, at least on present policies and political arrangements, to deepen further in many countries.

Taking it all together, the gap between aspirations and reality stands to widen; anger to rise; attacks on institutional architectures to intensify; and pressure for panaceas and strong leadership to build.

Differentiated country performance

These ills and prospects are evident to a greater or lesser extent in all OECD countries, as well as beyond; but some will handle the evolving situation better than will others.

Of the OECD countries, solidaristic Japan, northern Europe, Canada, Australia and New Zealand, and the Nordic and Scandinavian countries seem likely, on the showing so far, to fare least badly. The US outcome will depend importantly on the results of the November 3 rd election. Eastern European countries, Chile, and Colombia however look like being considerably more strongly challenged.

Among the bigger OECD economies, however, it is the UK that stands out. Already experiencing an extended productivity shortfall and a chronic external deficit, it is now confronted not only by the COVID shock but also by the economic consequences of leaving the EU.

Already the fabric of social support systems is stretched gossamer thin. The savings of one-fifth of the population are below £100. Conditions in some northern conurbations and other depressed areas are extreme. Relations between regional leaders and central government are fraying.

The situation reeks of the 1980s. And with the likely deal at best a low-level one, conditions can only deteriorate further with Brexit-related disruptions to commercial activity. In a development that will not go unnoticed elsewhere, the ability of the country’s already beleaguered government, or at least its Prime Minister, to survive the fallout is already being questioned. 

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