Will the economy recover?

May 21, 2020

After lockdown eases, will the economy face ‘revenge spenders’ or ‘tentative consumers’? Either way, warns Andrew Webb, ‘business as usual’ is going to look very different and businesses will need to adapt hard and fast.

As lockdown restrictions begin to ease across the island of Ireland, it is natural that we start to think about the shape of the economy into which we are emerging. Will the various measures taken to protect jobs and businesses succeed in cocooning the economy from a sharp and protracted downturn, or are we facing into a long decline?

The hope as we entered lockdown was that the economy would go into a deep freeze and then would pick straight back up from where it left off after the thaw. This is the much hoped for V shape decline and immediate bounce back. While that remains the hope, there is a growing body of emerging data to suggest that some lasting damage is being inflicted, and a longer recovery might be more likely. Astounding decreases in employment and vacancies, coupled with reduced consumer and business confidence, is leading economists to think about whether the path over the next couple of years is a U-shape, where output wallows in a trough before climbing back to pre-pandemic trends. While not an ideal scenario, it would be a much better outcome than the feared L-shape which sees output declining and remaining permanently below where it would have otherwise been.

Regardless of the path the economy takes, the pandemic and subsequent lockdown have prompted consumers and businesses to make dramatic changes in behaviours and practices. Consumer behaviour will now go one of two ways – ‘revenge spend’ for all the leisure and socialising that we missed would be a considerable economic boost, whereas the opposing ‘tentative consumer’, fearful about job security, will likely save more, thus reducing demand and prolong the recovery.

For businesses, there is much to consider. That dangerous phrase which can hold new and better processes back – ‘we’ve always done it this way’ – can surely never be uttered again without robust challenge. We recently had to try new things at a pace, and we pushed our technology hard. In most cases, it held up and should now embed into ‘business as usual’.

At a more macro level, business (and indeed country) resilience and contingency planning will come to the fore like never before, and I would expect this will lead to fundamental shifts. There is increasing talk of the end of globalisation as firms that were reliant on suppliers from thousands of kilometres away faced massive disruption, and countries without key capabilities in certain manufacturing sectors experienced difficulty in obtaining PPE, ventilators and testing capability. A quickening of the pace on automation across the economy is likely to follow, building in efficiency gains and more resilience to any future lockdowns.   

Of course, it isn’t just consumers and businesses that drive the economy. The Government’s role, particularly around providing job/income support, has come into particularly sharp focus. How we pay for the large public spending increases will come to the fore in due course. Given the austerity and public sector cuts that remain in our collective memories, I sense no appetite that an austerity agenda will fly again. That’s a discussion for another time. For now, the consensus view accepts that the economic and social cost of mass unemployment far outweighs the financial cost of supporting people to remain in work and supporting businesses remain viable.

Andrew Webb is the Chief Economist at Grant Thornton NI.