Information from The Economist, extracts from Philip Collins (British journalist and speechwriter) and my own personal opinion.
The change in globalisation order
As more activity moves online, business will become more dominated by firms with the most advanced intellectual property and the biggest repositories of data; this year’s boom in technology stocks gives a sense of what is coming, as does the digital surge in the banking industry
And low real interest rates will keep asset prices high even if economies remain weak. This will widen the gulf between Wall Street and Main Street that emerged after the global financial crisis and which has worsened this year. The challenge for democratic governments will be to adapt to all these changes while maintaining popular consent for their policies and for free markets.
That is not a concern for China, which so far seems to be emerging from the pandemic strongest—at least in the short run. Its economy has bounced back quickly. Later this month its leaders will agree on a new five-year plan which emphasises Xi Jinping’s model of high-tech state capitalism and increasing self-sufficiency. Yet the virus has exposed longer-term flaws in China’s economic apparatus. It has no safety-net worth the name and this year had to focus its stimulus on firms and infrastructure investment rather than shoring up household incomes. And in the long run its system of surveillance and state control, which made brutal lockdowns possible, is likely to impede the diffuse decision-making and free movement of people and ideas that sustain innovation and raise living standards.
Europe is the laggard. Its response to the pandemic risks ossifying economies there, rather than letting them adjust. In its five biggest economies, 5% of the labour force remains on short-work schemes in which the government pays them to await the return of jobs or hours that may never come back (see Economist article here).
In Britain the proportion is twice as high. Across the continent, suspended bankruptcy rules, tacit forbearance by banks and a flood of discretionary state aid risk prolonging the life of zombie firms that should be allowed to fail. This is all the more worrying given that, before the crisis, France and Germany were already embracing an industrial policy that promoted national champions. If Europe sees the pandemic as a further reason to nurture a cosy relationship between government and incumbent businesses, its long-term relative decline could accelerate.
The question-mark is America. For much of the year it got the policy balance roughly right. It provided a more generous safety-net for the jobless and a larger stimulus than might have been expected in the home of capitalism. Wisely, it also allowed the labour market to adjust and has shown less inclination than Europe to bail out firms that are in danger of becoming obsolete as the economy adjusts. Partly as a result, unlike Europe, America is already seeing the creation of many new jobs.
There’s still a lot of uncertainty about COVID-19, and markets don’t like uncertainty
Even with all the rearch and data out there we still need to know the following to the best of my belief:
- How long does immunity from COVID-19 last?
- Why are some people’s immune systems better able to fight off the virus?
- Why do some people’s immune responses cause damage, especially to the lungs?
- How does the virus ‘hide’ from the immune system and how can this be tackled?
- Does immunity to the previous infection with seasonal coronaviruses (which cause the common cold) alter a person’s outcome if they’re infected with SARS-CoV-2?
- Does SARS-CoV-2 mutate into anything more potent/less harmful?
- What other long-term side effects are there from the virus?
Can politicians lead us out of the COVID recession, or will they hinder recovery?
A major crisis can be either the making or the undoing of a political leader. Handle it well and you can come out on the other side with a reputation for being competent and decisive. Handle it badly and you could be marked for good. The leading figures in the government, and lots of their backbench MPs, are worried that they are witnessing a slow revelation that their Prime Minister and his team are not really up to the job.
Three stages to a crisis
The first is the outbreak itself. The public do not blame the government for the outbreak of the pandemic. The mere existence of the problem does not, in itself, spell political trouble for the government. The public are, however, watching to see how the crisis is handled and here the record of the government is, to put a charitable construction on it, mixed. There have been serious problems in getting equipment to care workers, there has been a scandalous disaster in care homes and the number of excess fatalities has been one of the highest in the world.
That said, the Conservative party had been leading in most of the opinion polls and the ratings of the Prime Minister are still respectable, albeit Sir Kier Starmer is now in front. Poor handling has had some effect on the government, but the position is recoverable – which brings us to the real problem. The part of a crisis which always bites, politically, is when the consequences come in. If growth goes into reverse and unemployment hits double figures, this is when the government finds trouble.
This is not necessarily a prediction of gloom.
A government can survive a recession and win re-election, as Margaret Thatcher and John Major were both able to do, but only if the opposition are regarded as not ready for office. While Jeremy Corbyn led the Labour party, the Conservatives could be relatively secure that the opposition would not offer the prospect of a government-in-waiting. That has now changed with the assumption of the leadership of the Labour party of Sir Keir Starmer. In a few months in the top job, Starmer has closed down a 20 point Tory lead and he is seen as potentially Prime Ministerial by large sections of the public. Labour still has a lot of work to do but the Conservatives can no longer assume there will be no viable alternative when the time comes.
The question that arises, then, is what the government can do
The great advantage of being in power is the capacity to act. Opposition is all about argument and criticism; government is about deeds. The first priority has to be to ensure that the pandemic is effectively beaten. It will be both an economic mess and a threat to the credibility of the government if cases begin to rise again during the autumn, if the schools have to be closed again, if a national lockdown has to be re-imposed.
Assuming that the pandemic does not return in earnest, what might the government do? It’s response can be split into policies that were planned in any case and those that are a direct response to the economic losses due to the pandemic. In both cases, it is important to note the way Boris Johnson’s government will differ from David Cameron’s.
George Osborne’s response to the 2008 financial crash was a drastic paring back of public spending. More than 80 per cent of the running repairs to the public finances came through spending cuts and just a little under 20 per cent was raised through taxation. It is not likely that Rishi Sunak will follow the same template. Infrastructure spending, in particular, is likely to continue. The government has inherited problems in housing and social care which cannot be easily fixed without lavishing large sums of money. The 2019 general election is also an imperative for government spending. The Conservatives won in some places – the West Midlands, the North West and the North East of England, for example, that are by no means their usual redoubts. They cannot allow these places to be the victims of a recession that follows a pandemic. The political pressure to act will be acute.
Yet the hole in the public finances will be significant and the Chancellor will have to raise money somehow. And here we have alighted upon the biggest question in the politics of this Parliament. How will it be possible to raise money without hurting Conservative voters? The answer is that it isn’t. Pensioners were more or less exempted from George Osborne’s austerity for the very good reason that pensioners vote in large numbers and they tend to vote Conservative. Yet if Mr Sunak rules out a large section of the population and brackets off their income – thereby denying himself the potentially large revenues that could accrue from pension tax relief – he will have to find the money somewhere else. Wherever he looks for the cash he will find voters unwilling to part with their money. It is going to be very difficult and this will be the way that the pandemic turns into political decline.