Macroeconomics Post COVID-19

Background  

It’s been more than a year since the world first realised the disastrous impact of the pandemic which claimed the lives of 4.82 million people (and still counting!). It was a profound event which, in a unique way, brought people closer together (despite the social distancing and lockdown measures implemented). We all felt each other’s pain, we mourned for the dead and prayed for those hospitalised as if they were of our own. And although we are still struggling to escape this unprecedented crisis, it is safe to say that during its onset, humanity bonded together like never seen before (at least in recent memory).  

The cost of life has been so devastating that for more than a year, the focus of policy and lawmakers was protecting public health at all costs (and rightly so!). This included the shutting down of businesses and international travel, the implementation of work-from-home schemes and unconventional economic measures which, in some countries, included lumpsum direct payments to citizens, the extension of loan and rent moratoria, the extension of unemployment benefits and other benefits in the form of subsidies and tax-breaks. 

Stimulus packages and Inflation  

As the June edition of the ‘Chief Economists Outlook’ published by the World Economic Forum acknowledges, the global macroeconomic conditions are still in a profoundly uncertain state with differentiated paths opening across countries, largely determined by the availability of vaccines and financial resources at the hands of policymakers. Fiscal stimulus packages have been passed by almost every country around the world to support citizens and maintain economic activity as much as possible. The USA (c.25% of GDP), EU27 (c.10% of GDP) and China (c.4.7% of GDP) injected the largest monetary sums to their respective economies for COVID-19 relief. Whereas in the case of the two latter ones, the measures put forward have been judged as proportionate to existing output gaps, the case of the USA is seen as more controversial. Some economists are sceptical about the intensity of the measures, especially because of perceived inflationary pressures.   

On the 31st of August 2021, it was reported that confidence in the future trajectory of the USA economy has fallen to a six-month low, with fears over COVID resurgence and the impact of inflation on the purchasing power of households on the rise. However, other economic schools of thought ascertain that the inflationary pressures exerted on the economy are not on the demand side, but instead on the supply side. The restriction of supply which arose largely due to complications with travelling and broken global supply chains exert an upward pressure on prices (in addition to the latest spike in oil prices due to OPEC restricting the global supply of oil and increasing the costs of production worldwide). If that is the case, then cutting down on stimulus packages to restrict demand is not only problematic in terms of not addressing the root cause issue with supply-side inflationary pressures, but it will also dramatically worsen household finances during a time of historic highs in global unemployment (which, in turn, will deteriorate aggregate consumption potentially bringing about a downward economic spiral). Unfortunately, and similar to every other economic crisis, it is much easier to pinpoint the root causes in retrospect – especially in a globally interconnected macroeconomy with an infinite number of variables moving around and painting a different picture depending on which subset analysts focus on.  

The Global Labour Market  

Perhaps unsurprisingly, one of the sectors which poses numerous complications to macroeconomic stability is the labour market. The beginning of the pandemic saw many workers being laid-off or put on furlough schemes which worsened their finances significantly and restricted their spending capacity in the economy. In the meantime, during the height of the pandemic, finding another job was next to impossible and as a result millions of workers have dropped out of the global labour force. Recent reports estimate that the total loss of full-time jobs worldwide amounts to 255 million; almost quadruple the total loss of full-time jobs during the global financial crisis of 2008. And these losses are expected to keep coming: in 2021, experts conservatively estimate an additional 36 million full time jobs lost, with the worst-case scenario figures ranging between additional 90-130 million lost.  

According to Statistica, in 2019, global unemployment stood at 5.37%. In 2020, this statistic increased to 6.47%; an approximate 20% increase. By comparison, global unemployment between 2010 and 2019 fell by approximately 9%. This means that within a single year, the increase in global unemployment was more than double the ‘gains’ (i.e.: decrease in global unemployment) achieved in the global labour market over a decade.  

To make matters even worse, these losses are not spread evenly among the different sectors of the economy. To the contrary, the global trend observed shows that these job losses are concentrated in what economist classify as low or middle-skilled occupations (e.g.: retail, construction, and hospitality) with young people and women being hit the hardest. At the same time, the high-skilled sector of the labour market, including white-collar and technology professionals, is expected to grow quickly and more intensely, deepening an already systemic and damaging issue around the world: income and wealth inequality.   

In light of these data, it is imperative for policymakers to understand the structural economic shifts that came about due to the pandemic, come up with the appropriate incentives for workers to return to the labour market and safeguard an inclusive economic recovery that is not hindered by labour shortages.   

Experts are also concerned over potential lasting effects on the global economy which can come from delayed waves on bankruptcies and evictions, permanent dropouts from the labour market or persistent damages to production networks and global supply chains. The shortages of workers plaguing major advanced economies around the world are optimistically expected to be resolved as the recovery continues. However, for some global powers like Germany and China who are already facing a shrinking labour force due to demographics, these shortages are expected to have a greater (negative) impact to their economies.  

Light at the end of the tunnel?  

The global labour market is currently in a ‘paradox’ state. For example, in the USA, many industries are struggling to find workers while millions are still unemployed following the surge of the pandemic. Some ascertain this mismatch between labour demand and supply to issues relating to low wages, lack of government support for parents (especially for home-schooling and pre-K), and changing priorities for workers in light of the paradigm shifting event that was the pandemic.  

Embracing technological innovation and automation could potentially solve any long-term labour supply issues by redefining job types and creating disruptive opportunities for decentralisation of operations. This structural shift would trigger both the demand and supply of labour to reach a new equilibrium at which much less social contact is required to execute the requirements of a job. In the UK, these shifting preferences are already visible: as the Guardian reported last year, only 6% of workers want to return to ‘normal’ working conditions, with 31% saying they would embrace large structural changes in the way the economy operates post covid and an additional 28% wanting moderate changes to the pre-covid status quo.  

As TORI has already predicted, (The Future of Work) we are already seeing how the financial industry has adapted to the changing environment, with some major FS firms announcing earlier this year that their employees will no longer be required to return to the offices, ever! Over time, mass technological adoption will stimulate a new type of job growth – one that is not bound by physical proximity but enables workers the flexibility to pursue both their professional and personal aspirations in a rebalancing act of working conditions that many suggest was long over-due. In addition, the ability to work in a decentralised fashion means that companies will be able to fulfil their skillset and capability gaps from a truly nationwide labour market instead of the geographically fragmented labour market that existed prior to the pandemic.  

How can TORI help?  

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