Sunday, March 14, 2021
Now the economy braces for the shock of the new normal
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Normal life is slowly resuming, with the return of schools in England a few days ago and their partial return elsewhere earlier. Schools are not the economy, but they are clearly hugely important to the economy. It is possible to see the light at the end of the lockdown tunnel, with all the usual caveats.

The January gross domestic product figures, released on Friday, which showed a monthly drop of 2.9 per cent, will with luck be the last such fall, though the drop in UK-EU trade that official figures also showed revealed a more enduring brake on the economy.

It cannot come soon enough for most people, least of all parents with school-age children, though I wonder how long it will be before we see an outbreak of lockdown nostalgia; a yearning for the days when there was no early morning commute and online meetings meant you could wear what you like, at least from the waist down.

The question is what kind of economy will we return to? How much of what has changed during the pandemic will become permanent? It is a big issue, and I cannot cover it in its entirety today, but let me make a start.

A few days ago, Andrew Bailey (I am sure impeccably dressed from head to toe), gave a speech to the Resolution Foundation think tank on this very theme. The Bank of England governor was speaking from his office in Threadneedle Street and revealed, among other things, that this was his first day working in the office this year.

The Bank has been looking at different aspects of the recovery from Covid. One key element is the extent of the recovery in demand, in particular what proportion of the involuntary savings built up during the pandemic will be spent by consumers. And, crucially, how much of the economy will get back on its feet to meet that demand, and how much will have been lost on the way.

Another, on which something of a consensus is emerging, is future patterns of work. I have pointed out before that working from home is not available to everybody. In its latest weekly assessment of the impact of coronavirus on the economy, Office for National Statistics’ data suggested that only 36 per cent of people worked exclusively from home in the week to March7. Most people are either still attending their normal place of work every day, because it is the only way they can work, or in combination with working from home.

It is this “hybrid” model of working that, it seems, will survive the pandemic. The Bank’s decision maker panel survey takes the temperature of chief financial officers of small, medium and large firms every month. The latest, carried out last month, showed that 49 per cent of full-time employees were working at least one day a week from home, compared with 14 per cent in 2019, before the pandemic.

For 2022 and beyond, the expectation was that 34 per cent of employees will be working from home for at least a day a week, with the most common form of hybrid working two to three days a week working from home. Surveys by Deloitte, the accountants and adviser, show a similar picture.

Mark Dixon, chief executive of IWG, known for its Regus serviced offices in the UK, suggests a variation of the hybrid model, in which people spend some of their time at home, some in a city centre location and some at a local office near to where they live. He may have bene talking Regus’s book but it was an interesting angle.
Businesses, meanwhile, are carrying higher costs as a result of the pandemic.

Measures to make premises safe and contain Covid added 7 per cent to unit costs last year according to the Bank and will be adding 5 per cent in the spring of this year, with a permanent addition to unit costs of 2 per cent. It is one reason why most firms are relaxed about employees working from home; the greater the attendance, the higher the costs.

This is one change, then, that looks like being permanent. Another permanent shift is to online retailing, up from 20 to 35 per cent of the total, which is unlikely to be full reversed with the shift back to “normal”. It was happening anyway but has been accelerated by the pandemic. This is bad for high streets but, as the governor noted, online retailing is more productive and contributes to keeping prices down.

Things will change. Hospitality, business travel, events and commuting into city centres will not go back to where they were. Trains and the Tube will be less crowded, and more in need of public subsidy, though firms may have to manage astutely to ensure that not everybody adopts Mondays and Fridays as their working from home days, straddling the weekend.

Even when things recover, some ground will have been permanently lost. I doubt if many people will take twice as many journeys, holidays or meals out to make up for the ones they have missed over the past 12 months.

This poses two challenges, and they fall under the broad headline of reallocation, of both capital and labour. It is hard to repurpose an aircraft, as Bailey noted, but there is a lot of talk about repurposing city centre offices and high street stores.

Some of that space, plainly, can be used to address housing shortages, and projects are under way to change the usage of retail and office premises. But there is a bit of a contradiction in some of this. The appeal of city centre living, for many, has been closeness to work. If work is no longer mainly in the city centre, that appeal diminishes.

What about labour, and changing what people do? The Bank’s view this time is that it will be easier to “reallocate” labour this time than after the great manufacturing shakeout of the 1980s under Margaret Thatcher, but harder than after the financial crisis.

This makes sense. It took many years before former industrial workers and miners were absorbed back into the service-based workforce in the 1980s and, indeed, many never were. After the financial crisis the UK witnessed something of an employment miracle, with the numbers in work rising by 4 million, or 14 per cent, between the low point of the 2008-9 recession and the eve of the pandemic, though some would say that this was accompanied by a rise in insecure forms of working.

This time, the challenge is to avoid so-called scarring. The Office for Budget Responsibility, the official forecaster, does not expect a “roaring twenties” for employment or a repetition of what happened after the crisis, predicting that employment levels in 2025 will only be slightly above pre-pandemic levels, and that unemployment, while peaking at quite a low level of 6.5 per cent, will not get back to pre-pandemic levels.

Any shake-up of the economy is painful. I doubt that people who worked on the beauty counter at Debenhams will be comfortable driving a fork-lift truck around a warehouse. But we have a flexible labour market and people are adaptable. The coming months and years will be a test of that flexibility.