Prepare to be pleasantly surprised by the speed of next year’s recovery

 New technologies and the collapse of outdated businesses offer hope of a giant leap forward in productivity.

Source- Daily Telegraph 20/12/20

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Infection rates spiralling, a renewed and increasingly severe lockdown, a European Union trade deal once more in the balance – for the economy, things could scarcely look more grim as we head into the Christmas week. Yet sometimes it is important to look through the storms of the moment to what may lie beyond.

The UK has its own particular problems for now as it struggles with the fallout from its divorce with Europe. Deal or no deal, this will inevitably mean the UK is slower to recover from the pandemic than otherwise, absent large-scale fiscal stimulus, a policy option that needs to be high on the list of considerations by Rishi Sunak, the Chancellor, for post-Brexit Britain.

But for the global economy as a whole, things are going to look a whole lot better a year from now with much, if not all, of the output lost to the pandemic clawed back. The surprise is going to be on the upside rather than the downside. This, in turn, should provide a decent following wind for a UK recovery.

The key here is mass vaccination, allowing for the steady withdrawal of lockdown restrictions and the resumption of normal social and consumer spending.

Looking at the experience in China, the only major economy so far fully to have recovered from the pandemic, the bounce-back was initially very much led by production and export. But in recent months, with the virus all but eradicated and public confidence growing accordingly, we have also seen the consumer economy coming back strongly.

If this pattern is repeated in Europe and the United States, where, as a proportion of the whole, the consumer is much bigger, we should be witnessing a big surge in overall activity by mid-year.

Record levels of saving through the pandemic suggest that a very high degree of pent-up demand will be let loose the moment businesses and households can be confident that the contagion is essentially beaten.

UK households were saving less than 10pc of income immediately before the crisis; in the April to June quarter of this year, the height of the first wave, this ratio shot up to nearly 30pc, or nearly one in every three pounds earned. It has been much the same in all advanced economies; we saved largely because we were denied the ability to spend.

It may take some time to return to past levels of consumption. Many people remain worried about their jobs, and this in itself acts as a big restraint.

People spend only when they feel confident about the future. Nonetheless, chances are that collectively we will want to treat ourselves after such a prolonged period of relative deprivation.

Real-time information based on credit card and bank transactions tracked by Fable Data shows a strong correlation between spending, saving and lockdowns. In the week ending Dec 13, coinciding with the end of the November lockdowns, UK consumer spending surged 9.4pc compared with the same week a year earlier, as non-essential shops and hostelries reopened.

This was presumably just a temporary respite, and has subsequently been choked off by the renewed restrictions, but it also demonstrates both a desire and an ability to spend. If there can be such an upswing even with the pandemic still raging, just think what might happen when it subsides.

During the course of the pandemic, economies have been subjected to a huge amount of stimulus, both monetary and fiscal, far more than was seen during and immediately after the global financial crisis. Asset prices, employment and household incomes have been well supported, so that we see nothing like the same hit to balance sheets experienced back then.

In economic terms, then, it is still possible to see the pandemic as more of a temporary interruption than the destructive bomb blast of the GFC. At the same time, however, the pandemic has brought forward from the future a number of lasting structural changes that in themselves ought to lead to something that has eluded advanced economies for a long time now – accelerated productivity growth.

Most rich economies have seen a marked decline in productivity growth since the financial crisis. In Britain, there has been barely any at all, a hiatus that may have more to do with very strong growth in employment than any underlying deficiency in economic performance.

Even so, the apparent absence of meaningful efficiency gain has been a bit a “puzzle”, given the evident technological revolution happening before our eyes.

One of the best explanations for it may be the so-called “J-curve” effect. This was recently explored in an updated paper by Erik Brynjolfsson, Daniel Rock and Chad Syverson for the US National Bureau of Economic Research.

Their central idea is that new technologies such as artificial intelligence require significant complementary investment, including co-invention of new processes, products, business models and human capital that can take some years to accumulate.

These investments are often intangible and therefore poorly measured, with the result that productivity appears to fall in the early years of a technological revolution, before surging at a later stage.

The pandemic may bring about the point of take-off in the J-curve, bringing with it more effective application of new technologies and a widespread cull of older, less efficient practices and businesses. If this proves correct, then we stand on the cusp of another giant leap forward in productivity and, therefore, ultimately living standards.tions of the 

Oddly, perhaps, many less-developed, emerging market economies have had a much better crisis than the rich West. This has surprised mainstream pundits, many of whom believed that poor healthcare systems and lack of fiscal space made the developing world particularly vulnerable to the virus.

Brazil, Argentina and India have admittedly been very hard hit economically, but Africa and much of Asia have, on the whole, fared pretty well.

Demographics have played an important part in reducing the seriousness of a disease that primarily affects the elderly; only 3pc of Africa’s population is 65 or older, against about a fifth in Europe and North America. Climate, allowing for a high degree of outdoor living and work, has also helped prevent the spread of the disease.

But African nations have also been smarter in their response, closing borders early and restricting travel. Then, of course, there is China, which, via authoritarian means, has been highly effective in terms of containment and eradication.

All this adds up to a global economy that ultimately rides out the pandemic storm far less damaged than might once have been imagined, and certainly considerably less so than occurred as a result of the financial crisis. Rarely are things quite as bad as they seem in the full grip of the storm; prepare to be pleasantly surprised by the speed of next year’s recovery.