The virus will cast a far-reaching shadow.
As we cross the 18-month mark of the pandemic, we are arguably reaching the point that the descriptor endemic may be a more appropriate term to employ. This is not meant to downgrade the ongoing seriousness of the medical situation, but it seems increasingly likely that the prevalence of the assorted variants of Covid will have to be accommodated into a world that tries to operate as normally as possible. The chances of an elegant solution that banishes the disease to the history books, in the manner of smallpox and polio, now look sadly remote, but so do the doomsday forecasts from respectable medical authorities that started to circulate in March 2020.
With this in mind, it seems appropriate to imagine what the economic, political and social environment will look like in the months ahead under the scenario of endemic Covid. It is our belief that all three areas will change to a significant degree, with the magnitude of change likely to fall somewhere between that of the financial crisis and World War II. Whereas the former was generally overestimated as a harbinger of change (the ‘new normal’ only differed from what preceded it by a few percentages of growth and a moderate aversion to home-ownership), the shock of the pandemic looks much more likely to recast economic and social activity in the United States and across the world. No doubt some of the more extreme shifts of behaviour will prove to be transient, but many others will prove much more long lasting, almost regardless of the degree of infection or serious illness that prevails in a few quarters’ time.
“From an economic perspective, the most important change is the redirection of personal consumption back towards physical goods rather than services”
We have written in prior columns about the shift in the relationship between the private sector and the state wrought by the pandemic, and will concentrate on other areas today. From an economic perspective, the most important change is the redirection of personal consumption back towards physical goods rather than services. We strongly believe that this will prove to be a long-lasting change in consumer tastes and it has already become apparent that the reopening phase, and concomitant increase in services spending, has not come at the expense of purchases of housing, home improvements or automobiles. Instead, it is supply which has proved to be the limiting factor, with the inventory of almost all finished goods depleted to the point that order backlogs and lead times are at record levels.
This in turn has underscored the fragility of global supply lines and the danger of cutting inventory to the point that “just in time” more likely means “a few months late”. We do not believe that we have yet seen the full impact of this aspect of the crisis, with manufacturers only starting to address the need to question business practices that had become embedded across industries. The need for greater productive and logistical capacity seems increasingly likely to be recognised, together with the preference for supply lines to be shortened and diversified.
All of the above implies that the demand for labour in these areas of the economy is likely to remain strong for a good while longer, which in turn suggests that the bargaining power of labour may have finally turned after almost a generation of outsourcing, efficiency and inventory management kept wage growth on hold. It is too early to tell how universal this shift in power will be, but the decade of low wage increase that followed the financial crisis looks likely to be replaced by a period of much higher wage increases in many sectors.
In the service sector the battle lines are likely to be drawn around the degree of flexibility offered to workers around home versus office, hours and vacations. As we move away from a period of crisis (when both sides were willing to do whatever it took to keep the show on the road) towards a more permanent state of affairs, the potential for friction should not be underestimated. Again this suggests that a shift in the balance of power takes place, although more over the issue of control of the workplace environment and corporate culture rather than compensation in this case.
“The schism between the US and China, that was arguably started by the appointment of Xi Jinping as a ‘Life President’, has survived the transition of power from Trump to Biden”
Geopolitics also looks likely to be mediated by the pandemic. The schism between the US and China, that was arguably started by the appointment of Xi Jinping as a ‘Life President’, has survived the transition of power from Trump to Biden. The very source of the disease, and the misinformation from Chinese authorities that stymied an effective response in the West, seem likely to be a source of contention for years. Furthermore, the very different experience of the Asian countries and that of the US and Europe seems likely to promote very different local memories of the event. Covid, therefore, seems likely to exacerbate a growing tension between the world’s two most powerful nations and accelerate the building of two competing spheres of influence in an echo of the Cold War, but played out in the commercial arena to a much greater extent than the US/Soviet rivalry.
Within China itself, the pandemic appears to have strengthened the control exerted by the state on the economy, with an increasingly explicit attempt to limit the degree of wealth, power and influence being created and held by technology oligarchies, with increasing controls over data collection and the regulation of private tuition. We expect these pressures to intensify and to be matched by increased regulatory scrutiny in the United States of Chinese controlled companies listed on US exchanges. The potential for this combination of an increase in external and internal tension to cause an ‘outlier event’ cannot be eliminated, with Taiwan commonly assumed to be a potential flash point at some point in the future. However, it is possible that Hong Kong proves to be the issue in question, a territory whose sovereignty China controls, but whose citizens have been allowed to enjoy a degree of economic and social freedom much greater than the mainland population since the handover from UK sovereignty in 1997.
As part of this arrangement, Hong Kong’s powerful capital market has been allowed to exist outside of the full control of the Chinese authorities, but it is possible that an increasingly nationalist China may seek to end this state of affairs. We could imagine the replacement of the Hong Kong dollar peg from the US dollar to the Chinese yuan being an attractive switch should the Chinese authorities wish to take a step that would cause chaos in Western markets while promoting their own currency as a truly global alternative.
