The dearth of European workers will mean higher wages, bigger investment in automation - and a squeeze on corporate profitability.
Source - Daily Telegraph - 19/04/21
Recovering from the Covid-19 catastrophe. Bringing all the extra debt taken on to pay for it under control. And of course adapting to our departure from the European Union while coping with rapidly accelerating technology.
It is not hard to list all the challenges the economy will have to cope with over the coming decade. But there is a far bigger one that doesn’t get so many headlines that is probably more significant: falling immigration.
Figures out last week show there was a net exodus of more than 50,000 people in the latest quarter for the first quarter of last year. It looks as if 2020 was the first year in which the immigrant workforce fell since way back in 1993.
That is a huge change, and one that will have a big impact on the economy. Wages will rise, especially at the bottom end of the market. Automation will accelerate, and productivity will finally improve. And whole industries will be wiped out, while profits will fall.
It will be better in some ways, worse in others - but there can be no question it will be very different.
Of course there is no great mystery about this is happening. Free movement within the European Union has now ended, and that makes the UK a far less attractive destination.
People can still move here, of course, but they no longer have the automatic rights they used to. And of course the Covid crisis has closed borders everywhere, not just in Britain. Few want to try their luck in a new country in the middle of an epidemic, especially one as badly hit by the virus as this one.
And yet if that continues - and it probably will - it will have a huge impact on the economy. Here are three big trends to watch.
First, wages will start to accelerate significantly. If there are fewer workers, then you hardly need to be Adam Smith to work out they will cost more. That is how supply and demand works.
We may well be starting to see the early signs of that. In the latest quarter average real pay rose by 4.8pc according to the ONS, and that was despite lockdown, and a catastrophic drop in output that you might usually expect to push wages down.
In reality, the wages statistics are more up-to-date, and more accurate, than the immigration numbers, so the outflow of people may well have accelerated already. If inflation does start to take off, as many economists are now worried that it might, it will not necessarily be the vast amounts of money the Government is printing to finance its spending that will be the trigger: it will be the rise in real wage sparked by a squeezed labour market.
Next, we will see huge investment in automation. As workers become more scarce, and as they cost more, there will be a huge incentive to invest more in machines to do the work instead. When you could always hire another Romanian at minimum wage (or even below it if you didn’t care about taking your chances with a law that is only lightly enforced) there wasn’t much need to spend a lot of money on a costly machine.
When that worker has vanished, suddenly the maths looks very different. Again, we are already seeing signs of that, and inevitably the tech companies are leading the way. Amazon has launched its checkout-free stores, and Ocado has just invested £10m in Oxbotica, a start-up developing autonomous driving systems. It will not be long before something that looks a little like R2D2 is bringing the groceries to your door.
Finally, expect a squeeze in profitability, especially in labour intensive industries. An endless supply of cheap labour has flattered the balance sheet of many British companies for the last couple of decades.
Whole industries have been built on the back of that (the number of coffee shops, for example, doubled last decade). Many of those will now have to scale back. If you thought retailing was tough already, then get ready for it to turn a lot worse; many shops are already barely profitable, and won’t be able to afford a rise in wages.
The same may be true of many nail salons, car washes and entertainment venues. Businesses that need cheap people to stay afloat will be in trouble, and the profit margins of every business will suffer. Expect to hear a lot of complaining from lobbyists about that.
Overall, we should expect less dynamism and innovation. New immigrants are more likely to be entrepreneurs than any other single group, and it is far easier to launch a new business when there is plenty of cheap labour around, and demand is buoyant.
There will be some winners - mainly lower paid workers - and some losers - mainly company owners and shareholders - from the sudden shortage of people. It will play out in ways that are often unpredictable.
But on one point there can be no debate. Falling rates of immigration will be the biggest force in the UK economy over the next decade - and we are only just starting to feel the impact.
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