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The Stay-at-Home Recovery Could Outlast the Pandemic

The Stay-at-Home Recovery Could Outlast the Pandemic

Tuesday, 3 August, 2021 - 04:15

The UK’s “Freedom Day” has been declared a damp squib by taxi firm Addison Lee, and it’s hard to disagree. Even with hospitalizations and deaths low — and cases falling — mobility is plateauing and below pre-pandemic levels in some areas. Brits are exercising their freedom to mingle selectively. We are a long way from the celebrations reported by historians after the Black Death. The economic implications will matter for all governments trying to work out where society goes after Covid.


It’s the unevenness of Brits’ movement after an end to Covid curbs, rather than the overall level, that’s glaring. According to Office for National Statistics data public transport usage is only at 84%, despite road traffic being totally back to normal. Retail footfall is only at 75% of standard levels — suffering perhaps from a lack of office workers milling around in their lunchtimes. Credit and debit card spending is still 8% below February 2020 levels.


Consumers are still hoarding: The savings ratio is at 20%, nearly three times the pre-pandemic level. Breaking that frugal habit will keep Treasury officials awake at night.


The lack of oomph here is already raising doubts over the narrative of a “Roaring Twenties” recovery in the UK and beyond. Recent economic data from the UK and US have been disappointing. The last mile of pandemic restrictions is proving the hardest from which to profit.


Some parts of this underwhelming activity may recover in time. If the cause is human psychology, and linked to lingering fear, then sound pandemic management — and the continuing success of vaccination drives — should lift confidence in the end. The same goes for the disruption of self-isolations due to contact tracing — the “pingdemic” — which should fall over time.


But we should also take seriously the idea that something fundamental has shifted in the economy. Lockdowns have become habit-forming — especially the second and third rounds of economic closures in the UK and Europe, which showed businesses and consumers increasingly able to adapt to social distancing with smartphones, videoconferencing and e-commerce. For many people, the adjustment was so pleasant that they decided to drop everything to live elsewhere.


The economic consequences of a less mobile society could be huge. The uneven recovery between urban centers and rural locations, which is still clear from London’s lag behind the UK, will persist. The glacial pace of return-to-office (over a fifth of workers are still working from home, with only 65% back to their normal place of work) will make it harder to avoid permanent economic scarring. Office for National Statistics data for early July shows nearly a third of UK businesses have seen turnover decrease in excess of 20% compared with volumes normal for the time of year, with 5% seeing a fall of over half. Not all will survive.


Meanwhile, the increased success of digital-first businesses and tech-savvy workers will contribute to what the Bank of England’s Ben Broadbent has called economic “mismatch.” Reallocating jobs and investment towards economic activity that thrives in socially-distanced societies will take time and money, and may worsen inequality. “We can’t all become IT experts overnight,” he recently warned.


Policymakers have tools to ease the mismatch. City centers and workplaces, provided they keep showing Covid is manageable, could be made more attractive with subsidized rail tickets — akin to Chancellor of the Exchequer Rishi Sunak’s Eat Out To Help Out — to encourage travel. If long-term creative destruction lies ahead, then the focus needs to be on re-training and re-skilling the workforce to limit the pain. This should already be a priority: UK business lobby CBI estimated last year that an extra 130 billion pounds ($181 billion) was needed over the next decade to upskill and retrain adult workers.


The dystopian pandemic visions of cities laid to waste has failed to come to pass, but we are still a long way away from a post-Covid boom. The UK economy is about 3.4% smaller than pre-pandemic levels, according to Nomura economist George Buckley, and closing that final gap may prove much harder to achieve than expected. Lifting restrictions may turn out to have been the easy part.


Bloomberg


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