By James Sproule
In decades to come, we are likely to look at events of the last two years as the first signs of a new economic world order. Like so much else in life, the individual impact of this new order will depend upon where you live and the decisions that local politicians and business leaders make. But the economic changes we are experiencing, from the way we shop, to what we value and the debts that governments around the world have run up, are all going to be a part of our new normal.
Something of the scale of the Covid global pandemic shock had not been experienced in a century. It turns out it is one thing to imagine a global health pandemic, it is quite another to conceive what governments might do and how people and businesses would react.
Governments were ill prepared - and they shut down their economies in ways that had never been previously contemplated. The IMF estimates that global GDP dropped by 3.3% in 2020, which in dollar terms is $2.8 trillion. It is as if an economy roughly the size of India simply ceased to exist.
Economically, there are three themes now running: a reasonably strong bounce back is underway and so long as consumers remain confident, it may well be that by 2023 global GDP has fully recovered. Secondly, governments have in many cases run up scary amounts of debt, with industrialised countries adding more than ten percent in a single year to their already heavy debt burden. That is also before they realised the pandemic was a heaven-sent opportunity to spend on political projects. Thirdly, the pandemic has accelerated the pace of change, from the way we work, to the way we consume.
The strength of the economic bounce back is in some ways unsurprising. The economic shock was wholly artificial, so as restrictions are lifted life should be expected to return to something like normal. The key is discerning where the pandemic has accelerated fundamental changes. We have for instance seen a decade’s worth of expected progress in retail in just over a year. Online shopping jumping by 50% to nearly a third of all retail sales. We are seeing a fundamental reassessment of where people want to work being set against the value of collaboration, the results of which are still being debated. Economically the pre-pandemic world is one in which globalisation had been the dominant backdrop for decades. The onset of the pandemic brought to light the degree to which many people’s consumption, from personal protective equipment to generic pharmaceuticals, was dependent upon high quality and low-cost Chinese products.
The pandemic has raised concerns about this dependence and led to a widespread desire by businesses and governments to diversify sources of supply, both from a security and intellectual property point of view. This will be an evolutionary process, but it will drive a good deal of long-term investment and offers the agile and the entrepreneurial real opportunities a bit closer to home.
The Global Financial Crisis (GFC) of 2007-09 was, until now, the most significant global recession since the Second World War. The measures taken at the time successfully saw off the threat of turning a credit crisis into a depression. But the policy actions continued well into the recovery and since then have left us with another set of economic challenges. Most importantly, the global economy has become very dependent on cheap money. Central bankers implemented and have kept in place zero interest rate policies and Quantitative Easing (´QE´) measures, meaning they buy bonds in order to keep yields low.
The idea initially was to give businesses time to adjust post the GFC; but the time never seemed right to normalise monetary policy and the result of holding yields down has been that asset prices have soared. Nowhere is this more apparent than in sovereign bonds, where a host of countries from France to Finland to Japan now see investors accepting far lower returns than they ever would have imagined as acceptable just a few years ago. The challenge now is to hike interest rates which would result in rises in the cost of government debt servicing, necessitating either spending cuts, tax rises, even more borrowing, or all three.
The sustainability of this unusual situation is called into question by inflation. Thankfully much of the inflation seen today in places like the US and UK is likely to be transitory. But there are longer term concerns, from the six-fold rise in global shipping rates, through to wages which continue to outpace productivity by a wide margin. The assumption is that none of these are going to raise people’s longer term inflation expectations, but the longer these exceptional circumstances persist, the less exceptional they seem. Sorting this out is going to be a priority of finance ministries and treasuries around the world, but ultimately debt burdens are manageable so long as they are long term, which necessitates that inflation is kept under control.
Finally, while emerging from the pandemic is a challenge, as is dealing with the financial aftermath, neither gives particularly good guidance on who might not just survive but thrive in coming years. Entrepreneurism is flourishing around the world. According to the Global Entrepreneurship Monitor, in 2001, approximately 7% of workers were actively engaged as an entrepreneur or working for an entrepreneurial firm. Today that figure has almost doubled. Only a very few of these firms are going to grow to even mid-size companies, but those that do will be the backbone of future prosperity. For the US and Indonesia where some 14% of workers or the UK and Taiwan where 9% workers are deemed to be entrepreneurs, there is a good deal of justified optimism. For others, challenges remain: in Germany this number is 7.6%, in France it is 6.3%, and Japan just 5.3%.
Perhaps even more important than new firms themselves, the attitude entrepreneurs bring to the wider business world of accepting innovation and new ideas is going to be vital to long-term success. Charles Darwin is reputed to have said: it is not the strongest who thrive and survive… but the most adaptable to change.
In that sense, it is the ´mid-market´, and its trusted advisers, which is set to inherit in the post-COVID world order.
James Sproule formerly served as Business Advisor at No 10 Downing Street and is a Chief Economist at a global private banking firm, the views expressed here are his own.