Kaizo Live – Coronanomics: scenarios for the UK economy in 2020-21
Kaizo Live – Coronanomics: scenarios for the UK economy in 2020-21
RHODRI HARRIES [00:00:32] Welcome to today’s edition of Kaizo Live. Where we explore issues and insights impacting PR and communications in the U.K. and globally. Today, I’m joined by Graeme Leach, who is the CEO and Chief Economist of Macroeconomics. He’s going to be discussing a new paper he’s been developing about the impact on the economy or what we might see as the impacts on the economy of the Corona virus. It’s called “Coronanomics”, so, I can imagine you can see where the names come from. And I’m to do bring him onto the show. Graeme, firstly, could you just give us a bit of background on yourself and also for our viewers, be really interesting to know how you’ve been adapting to working through the crisis we’ve been in at.
GRAEME LEACH [00:01:15] Well, good morning, Rhodri. It’s great to be with you. Yeah, it’s been an interesting time. I’ve been very fortunate, actually, because I’ve got two hats. I work for macroeconomic on the economic side. I also work with global futures and foresight on the futures angle, which is the longer term societal changes from economics, technology, demography, political change. And really, you’ve had all of them rolled into one at the moment and in the short term as well. So, we’ve been doing a lot of work. Coronanomics is looking at the short term scenarios for the UK economy, and on the wider world as well over the next two years. But we’re also looking at the enduring legacy in terms of geopolitics and what it means for the future there and what the enduring legacy will be in terms of nationalism, globalisation, all the big trends which are being accelerated at the moment by corporate. And we’re also doing a more enduring legacy on the economics front as well. Examining what it will bring in terms of an acceleration potentially in technological change, we’ve taken a very positive view about the future impact of technology on the economy in the 2020s, that there’s going to be an upward inflexion in productivity growth. And we think, paradoxically, COVID accelerates that because certainly there’s a way some new business model. And the public openness to being to produce and implementing a more agile business structure in the future.
RHODRI HARRIES [00:02:56] While, I’m all for positivity and certainly all my clients would. I would love to hear about the positive impact we’re gonna have on the economy and the positive changes we might see. And I would say at the moment, it feels that the economy coming back to the UK feels in a pretty parlous state. How worried should we be?
GRAEME LEACH [00:03:18] Well, we should still be very worried. Over recent weeks and months, I’ve written economic scenarios never thought I would able to write in my career. And the report we’ve produced argues there are still five economic scenarios for the future and I’ll explain those, unpack those more in a second. But the reason we’ve still got five economic scenarios is because the epidemiological uncertainty is still so great. We could have a faster lifting of the lockdown over the summer period. We could have a very fast lifting of it. Alternatively, in worst case scenarios, we could have a second or third wave to the pandemic over the autumn winter period and through the winter 2020,2021, which would have catastrophic consequences for the economy. Maybe, so let’s just unpack these scenarios.
RHODRI HARRIES [00:04:10] It would be more interesting. I think if you could give us talk us through those five scenarios and maybe we’ll come on to some of the reasons, the impacts or the issues of those and how much of these are tied to global happenings or how much of these are related to how our government has or hasn’t reacted to dealing with the price crisis.
GRAEME LEACH [00:04:29] Job cuts, “pension service”. What we’ve set out is actually what we call a sympathy scenario, which is really it’s a miraculous recovery in the economy. It’s a scenario whereby you get most of their fall in output reclaimed in the third quarter of this year by the end of September. And that, you know, that remains possible. We haven’t started the third quarter yet. So a very fast “lift” down, a lifting of the lockdown over the summer period. And some of the easing in social distancing could facilitate that. But that would be a miraculous recovery. Our V shaped scenario is one where you get a recovery in all the lost output by the end of this year. That is much closer to the scenario I was looking at by the fiscal budget responsibility. And the treasury and for the Bank of England, of course, in the baseline scenario. So that would be a full recovery, but it would be by the year. And that would still be pretty good. Now, we’d still get a very large fall in output for the whole of 2020. But if we can reclaim that output by the end of the year, we’ve done a pretty good job. And that would actually be a kin to previous pandemics. Does the 195- 58 period in the UK, when we had the Asian flu and 68-69 actually into early fall 1970 in the UK with Hong Kong flu. But in both those cases, you had a complete reversal in the ball in that quarter. It is necessarily going to happen, obviously, of course, in the super V, although it remains possible. But that sort of bounce back is possible now. Well, it makes it less likely that they get to super V style, that’s back of more of V. It’s simply the “depth” of the fall this time around. Back in “1578, and 68, 69, and 70”. You did not have the scale of economic fall and cut up what we had today. So I would kind of go possibly for V, probably more likely the U and the usage scenarios whereby you, you get the recovery now put, but it takes most of next year as well and into the following year to reclaim it all such depths of the downturn. And so you end up as well in that scenario with much higher unemployment for a sustained period and just much more precautionary behaviour, both by households who were scared about the future of their thinking. You know what’s gobba have to my job? I’ve got full of the load. Will I get furlough to go? “What have I get made redundant?” Makes people much more cautious for small businesses who may be offered only 12, 16, which cash at the start of this crisis may well drain substantially or all of it. I’m thinking, well heck, if this comes back, I’m gonna to build up the reserves. So you can see that the potential for caution is enormous. And in those circumstances, the U becomes more likely. And I think the bait. So you’ve got to ask me. I’m not a betting man. But if I was a betting man, where would I go? I’d probably fall somewhere between U and V. But I’m afraid we’ve got to consider two others as well. And there’s a W and there’s an L. And the W is one where we get a bounce back. We get something like a V or maybe a U. But then some stages maybe in the winter of next year. We do get waved on that. And then you get another “super bowl” lockdown. Basically, the reintroduction of measures of that beat. Obviously, that is a damaging situation because you go into that then already with high unemployment. You’re going through that with these already weakened their work before and you go into that with a government which is much more indebted than it was before.
RHODRI HARRIES [00:08:46] Will the you know, if we have that W’s scenario? I’m just wondering if the we as businesses and a society we’ve adapted to this way of working. So will we not be able to adapt quicker? Will that have any impact on that?
GRAEME LEACH [00:09:05] I think it would. And I think it’s absolutely correct. And just as some economies responded better to the pandemic, you know, those probably most impacted by SARS back in 2003, people responded probably better. And we will learn the lessons and have systems in place to contact and trace, which we didn’t suddenly don’t have maybe yet even now and suddenly didn’t have at the beginning of all this in the UK. So that will help, but that will mitigate some of the effects. But when you’ve already had this short contraction in output and even if it meant that you wouldn’t maybe false fall again and you would bounce back maybe quicker because you’re coming from such a low base, you would say it would still mean that by the middle of this decade, you still haven’t reclaimed all the lost output, which would just be truly phenomenal. I mean, if we, if you’d forecast a normal recession, you just said that’s the normal recession, that those sort of numbers of a depression is the 1930s. And, of course, “through the worst of them all”, I don’t want to upset viewers, “to” many children “fight them out of the room”, the worst scenario is the “al-Sheik malware”. Really, we don’t get much of a bounce back. We get uptakes in the the virus over the summer, autumn period. So the lockdown doesn’t fully lift. And then you get a second wave on top. And in those circumstances, it’s an extreme version of the 1930s in those circumstances. It takes to the best of the decade to reclaim lost output. So here’s the story. Here’s the big story. The big story is that theoretically we could regain all the lost “outpoll” by the end of September. Or it could be the end of December 2029. It’s just.. war, because redeemed, logical, uncertain, is like the epidemiological as these go back, because these guys don’t know for sure. Estimates of herd immunity remain very low, very low indeed, suggesting that a second or third wave is a certainty. But there are also those who argue those serious scientists here who argue actually the cause of the variations in susceptibility. And because some groups are really vulnerable and because of what they call super spreaders, people who are more likely suspect numbers. If you factor in that variation to the herd immunity calculation that actually you may be able to get herd immunity at less than 20% of the population, which would mean a place like London where you’ve got 17 or 18% herd immunity already. Which would mean that I see that they’ve got it already. And that kind of explains by lifting the lockdown already and you walk around London, there’s a lot of people there. But that’s been a spike. So so maybe variations in the susceptibility mean that the lockdown is gonna get lifted a lot quicker than we think.
RHODRI HARRIeS [00:12:13] Well, I suppose we I mean, we were talking about earlier, the prime minister is due to announce pubs reopening for the fourth day in a row today. Yeah, there will be headlines tomorrow as well. And there seems to be an air of positivity around the changes happening at the moment. Mean it feels like it’s a situation where one can choose their opinion and then look for the expert advice or the expert insight to support that rather than doing the other way round. I wonder how on earth is the government and how on earth business supposed to planned all of this, given the uncertainty and given the fact that you were saying there are in fact five different models, two of which feel palatable. One of which feels worrying and two of which feel very unpalatable?
GRAEME LEACH [00:13:05] Well, the Bible says you should pray for your leader. I think this is one moment in history when they most definitely do need up. You need the wisdom of Solomon at a time such as this. And it is very difficult because the politicians have to be guided by the experts, but the experts are very uncertain. And so one of the reasons we wrote this report actually was to sketch out the different epidemiological scenarios to actually rooted in that and say, look, if these are the scenarios, then you factor in the wider economic and social and political and technological factors. So you end up with a story around each scenario. And the aim of that is so people can be, once they understand the story for each scenario that they can actually see eye to eye. The milestones along the way, the signal, the end of little or not the super-VB, U, W, L scenarios are coming to us. You need to understand the story. I react strongly against kind of overdependence on models and economics. You just can’t quantify power for these things in many. We need what I call narrative forecasting, where the story is more important than the numbers. That’s not to say the numbers are unemployment. But you do need to have this emphasis on what is the story and how can I understand which chapter is coming to pass.
RHODRI HARRIES [00:14:41] We’re fifteen minutes into this and we’ve talked about economic models for the rest of the year. Yet we haven’t talked about the biggest headline from an economy perspective, which was talked about all last year. And negotiations are going on all the time behind the scenes. And that’s Brexit by the end of the year. It looks like, I guess we will have a no deal Brexit. How does that factor in?
GRAEME LEACH [00:15:05] Well, isn’t it? It’s amazing, isn’t it? Given. To fit the story last year, which utterly dominated the last two or three years, utterly dominated every news story. Brexit, Brexit, Brexit and then we entered 2020. And it’s still Brexit, Brexit and then suddenly disappears. And it states most definitely a secondary issue. One of them striking things that people see very clearly if they read our report, is that Brexit doesn’t actually play into the scenarios. And we actually feel that because of that, it seemed bold red type at the beginning of the report as an explanation of why Brexit doesn’t appear in the scenarios. And the reason is quite simple. When you’re looking at 20, 30% contractions in output, one composer on another. And the potential for a bounce back of similar orders of magnitude as well. And even if you and he gets a small fraction of that, let’s say a 5% or 4% “quote on quote” movement that will simply swamp any Brexit factor. Deal, no deal, WTO agreement, Canada style plus agreement, whatever it is, that is not gonna change the fundamental story here because of the sheer scale of the traction in outpoll in the second quarter of this year. And so, yeah, Brexit is still there. But at the end of the day, it just slightly to “exist tonight, done check the distortly”.
RHODRI HARRIES [00:16:46] Extraordinary. In terms of consumer confidence, is that is that driven by the economy or was is that helped to drive the economy? How does that work?
GRAEME LEACH [00:17:00] I think it’s interesting because some if you look at, say, the states in the States, they’ve had this phenomenal spike in. I’ve got the latest UK figures to compare with the same time period in States, but in it in the US, they went from a savings ratio before the crisis of about 7 or 8% to immediately after about 13%. And then the latest numbers suggest a savings ratio of 33%, which is just off the scale. I mean, every chart spin off the scale up, pull down over recent months. But this is just phenomenal. And so if you just looked at those figures, you’d say, wow, that’s some potential for bounce back. That’s money burning a hole in a lot of pockets. And it’s a lot of money burning a “big, big hole in a lot of money”. But actually, the story is never that simple. And of course, what we do know is we’ve “learnt two theories already” is the cautionary behaviour is intense. Consumers are worried because, hey, when the furlough program ends, I might be made redundant. I better store up some cash just in case, even if I’m confident of my employment position, now, everything’s been cool. Today, it might not be, if there’s a second or third wave. So I’m just gonna be cautious. So I’m gonna save some of that cash. It doesn’t prevent about back. It doesn’t prevent probably some images on the television of people queuing it and bursting through the door because of sales. So it looks like New Year’s Day, but I think we’ve got to be cautious and I’m not sure how sustained any such such bounce back would be. So there will be precautionary behaviour by consumers. Without that, there is for those who have remained in employment, I know. Relatively confident, secure the potential for spending some of that money in lockdown left. But I think there is always gonna be a higher savings ratio in the second half of this year than the first half we’re not gonna get. Some really, really shocked about spot that just because until unemployment gets back down to more normal levels, even under the “supervision” scenarios that’s into next year, even that “everybody recover” by the end of this year, unemployment’s still gonna take a little bit longer. I suppose small businesses in particular may have burned through all their cash reserves already. And so they’re going to be cautious. So, yeah, the cautionary behaviour is going to “captilized” even the recovery here.
RHODRI HARRIES [00:19:39] But to be clear, even under the super-V. What we’re not talking about is going back to a level of employment, a level of consumer spending. We’re going back to a level of output and then we’ll see that happen over a period of time?
GRAEME LEACH [00:19:51] We will see a reversal in falls in GDP and consumption. But what we won’t see is an immediate reversal, even with those scenarios, you know, employment, unemployment will surely fall sharply. It will fall and under those “super-V” scenarios, far fewer people get made redundant at the end of the furlough program in October. So there is a bounce back. But the labour market lags and takes a little bit longer to catch up.
RHODRI HARRIES [00:20:24] So we talk about the UK and you’ve mentioned the US as an example. Are we outliers in the UK or can you see as a similar type of modelling happening or the similar type of scenario happening in other markets in Europe?
GRAEME LEACH [00:20:39] Yes. Output it in Q2, so everybody is now casting what “both Apple” is doing now. So they’ve got this variation. I mean, if you look at the UK, you had everything from minus 35% to probably minus 50%. So there’s 20% point of variation in people’s estimates of what the economy did in the UK in the second quarter. And a similar variation that save that the US and in other European countries as well. Obviously, those most affected by the pandemic, Italy, Spain, are gonna obviously be on the worst end of that scale. That’s up. Yeah. I mean, similar story. Is Germany expected to better probably Sweden as well. But we’re still really not sure what the base the what the starting point, as it were, for recovery in Q2. It depends to. On how far we fell in Q2, and we still don’t know the answer to that question. And we worked some time, actually. The deeper this is, the more non-linear it is and the more dangerous it gets and the more difficult the recovery gets.
RHODRI HARRIES [00:21:57] “Does” business or all government? What are the dates I’m looking at? When am I thinking, well, I need to plan in the future, I need to plan my next course, I need to plan my next half but at the moment, it all feels too uncertain to set any any clear goals and specific dates. You’d be thinking, well, why the first is September or do those things come into play?
GRAEME LEACH [00:22:20] I think we will see over the period, the July, August period, the scale of the lifting of the lockdown and the way the news is messaged in the media will very significantly shape consumer and business opinion over that period. What does that mean? So that would need evidence that consumers are coming back and they’re spending that will need evidence that all the books are beginning to pick up. It will see evidence that the travel restrictions are being lifted and can get back to normal. There’s a whole castle of issue. Do you looking for the story? And that will be “shared” by many, many… so business should look at hard data. What are the employment numbers? Is the reverse. But they should also look at survey data for consumer expectations and business surveys. PMI surveys. One of the key thing that’s “challenge of course in China” is the PMI survey. Bounced back and recovered lost ground very, very quickly in China because then what happened is that the export order books weren’t very strong because the rest of the world was going into lockdown as they emerged. Well, again, there were there are going to be variations, depending on where your market always a company, are they within the UK, or are they in developed advanced economies, although they are actually in the emerging markets, which is still lacking, and we still have a massive problem. Brazil, the most obvious case there.
RHODRI HARRIES [00:23:57] Yeah, I think we’ve seen the news today in Brazil and I know some cases rising in Africa as well. So, I mean, if there are parts of the economy or businesses which are safer or more durable to survive any of the Ws and the Ls in this “world” which of those areas do you think? Are there obvious pieces of the economy?
GRAEME LEACH [00:24:20] Obviously, if you’ve got a public sector clients at the moment, you’re probably look, you’re okay. Obviously, many sectors, technology sectors are doing very nicely and the new business models have been discovered and found every day. And so those companies aiding that sort of process as well. And that could be tech, but it could be general business consultancies. So the problem is sectors don’t really answer the question because there’ll be huge variation within sectors as well. And we were talking before the program. One of the amazing factors is just obviously there’s more virtual business models, new bullet ways of working of emerged, more agile approaches. And so companies may want to go down that road. Let’s say, with them and reduce their office space, most obviously example. But they may have a competitor who just like to do exactly the same. But instead of them being on a one year lease, they want a 15 year lease. So they can’t get out of this situation. And so they are going to be lots of constraints, both within sectors and even within companies, between companies as to how they can respond to this and how their workforce has responded to the crisis, and that’s a people. So there are huge people issues as well here where somebody’s been affected on mental health issues as a result of being isolated during the lockout. Whereas others have just embraced the change. Love it. I don’t want to go back to “commuting, boss” quickly change the system as fast as you can because we love this. So it’s very tricky here to actually say who’s gonna win and who’s gonna lose.
RHODRI HARRIES [00:26:12] Well, I’m not sure I should ask you if you “feel good on which you’d be all fine because you think you set it down” at the beginning saying you don’t really know at the moment. But maybe we could use the last couple of minutes to talk about some of the pieces you start, you started to you about in relation to positive impacts and technology is going to have in terms of changing the way businesses work. So what positive signs or changes of work might we see over the next coming years?
GRAEME LEACH [00:26:37] Well, I think technology is one of the much misunderstood economics stories of our times, because over the last decade, in the wake of the great financial crisis, we’ve had terms such as secular stagnation, which is basically very weak positivity, growth. That’s dominated discussion, and everybody in classic economic fashion, they’re extrapolating the past into the future. And so that’s how they see the 2020s. Just more of the same. And so under that story, then we get, it’s basically, oh. A bad situation, it’s just made worse by COVID. I actually think quite the opposite. Even before COVID happened. Writing a book here which says that actually there was going to be an upward inflection, positive surge in positivity growth in the 2020s. We shouldn’t have expected it often up to now. It takes time for new technologies and new business models to permeate all of society and create markets. Just as the discovery of electricity in the late 19th century didn’t actually yield its full economic return, probably until the living 2020s. And so I would actually well, I was gonna repeat that now, just as you had Spanish flu in the roaring 20s. I think we’re going to have Corona virus and the rolling 2020s a century on. And one of the reasons for that is the sheer scale of technological change at the moment. And the fact that you’ve got this confluence of a perfect storm in a positive, AI, IoT, 5G, new business models. All of these things require agility and openness to change and an ability to implement change. And I think all of these things off facilitated by the Corona virus’ impact. And so there was going to be an upward inflection, I would have argued before Corona. And that certainly contrasted with dimensional wisdom. All I’m saying now is actually that “Payson’s that number is more like” something that was better happen if only going to happen sooner and faster than they otherwise would have done. “That’s not to say it turns out media suddenly, but with these surges up over the night”. What is saying is that the underlying structural changes in the economy here, which are kind of facilitate a stronger growth in the future.
RHODRI HARRIES [00:29:16] Okay. And then you’re writing a book on this you said.
GRAEME LEACH [00:29:22] Well, hopefully the middle of the autumn, later in the year, if it is essentially argues that the 2020 is will be characterised by a triple shot. We’ve got Corona, but we’re gonna be two other huge shocks. One is a Blue Chip Technology shot with a thought. The other is a “collective biography, shock” for the ageing population and what that means for public sector public debt, and especially in the wake of Corona with very high levels of public debt. So the book basically argues triple shot says that we have once in a century events, in one decade in 2020s.
RHODRI HARRIES [00:30:06] Well, I’m looking forward to the technology positive shock, it’s the one I’m focusing on as part of the end of this interview. Graeme, thanks very much for joining us today. You’ll be able to find the paper a Coronanomics, which I struggled with pronunciation. Coronaomics on the macro- economics website and please download a copy. It’s fascinating stuff. He is rooting for a super-V or V and fingers crossed against the W an L. So thank you, everyone, for joining us today. This episode of Kaizo Live, along with all the other episodes you’ll be able to find on our website, kaizo.co.uk and we look forward to seeing you next time. So thank you very much for tuning in.