As we head towards the slimmer Spending Review on November 25th, due to the economic turmoil caused by Covid-19, the consequences of this uncertainty will continue to reverberate for the rest of this Parliament. Gross domestic product (GDP) is not expected to return to pre-pandemic levels until early 2022, although a prolonged end to the pandemic means it could be 2024 before this happens.
The Spending Review will only cover one year, not three years, and means fiscal decisions on what funding will be allocated to support the economy after the public health crisis ends have understandably been postponed. Although there’s some hope on the horizon with the great news that a vaccine may soon be approved for distribution, a mammoth challenge remains to immunise enough people as quickly as possible. Until then, it isn’t known if there will be further lockdowns or how long social distancing restrictions will last.
Inevitably, this is going to mean more economic uncertainty. Businesses will also have to grapple with the consequences of new regulatory and fiscal barriers to trade, the shape of the final trade deal with the EU (if one is agreed) and to a lesser extent, the value of trade deals signed with non-EU states.
For organisations struggling to make sense of future policy decisions that ministers will have to take, public affairs teams have a critical role to play in navigating their Executive teams through deep political water. I write some more about what public affairs teams could think about, but deep analysis, better strategic risk planning and sharper tactical execution are all important tools to deploy.
With the first wave effectively freezing supply and demand in the economy, the UK’s GDP plummeted in the second quarter of 2020 by 19.8%. Whilst the third quarter saw growth rebound at 15.5%, the economy is still 9.7% smaller than before the pandemic.
The inevitable extension of the furlough scheme until the end of March 2021 will provide a lifeline for many. However, during the third quarter of 2020, the unemployment rate rose from 4.0% to 4.8%, and with the second national lockdown and furlough scheme extension, this figure is projected to increase to about 6.3% by March 2021. The second national lockdown, whilst less restrictive than the first, is likely to damage the recovery further, as may future local restrictions.
If the furlough scheme ends in March, this will increase the unemployment rate, though it will also be influenced by the scale of the public health crisis, whether it is firmly under control and if the labour market is growing or not.
The impact of the crisis is likely to linger long after the economy returns to some normality, with the effects of economic ‘scarring’ hitting the young and low-income earners especially. The negative impact on young people, low-income workers and the drain on human capital and mental health means policymakers and communities will be dealing with the financial and emotional consequences of this recession long after growth picks up.
Low-income workers tend to work in sectors such as retail, leisure, and hospitality. These are sectors are damaged even more by local lockdowns and social distancing measures. In addition, low-income workers do not have access to sufficient savings compared to the better off.
Evidence from the think-tank, the Resolution Foundation, found that whilst all age groups suffer unemployment following a recession or economic shock, young people are harder hit, in part as they are less experienced. Recent figures from the Office of National Statistics (ONS) show that employment levels were lower during the third quarter of 2020 compared to the first quarter, with 498,000 job cuts. This hit young people the most, who accounted for more than half of these job cuts (274,000). Compared to the rest of the labour market, a higher proportion of young people are likely to work in the retail and hospitality sectors. If economic growth is patchy, there is also the risk that some employers may look to reduce pay and hours, which will reduce financial security. On top of this, less access to jobs and more time spent unemployed also impact career mobility and how much young people will earn in future years.
As the UK economy is heavily reliant on services, the probability is that instead of a ‘V’ shaped recovery, the UK may be heading into a ‘W’ shaped recovery – slow, longer, and more uncertain. Even a ‘K’ shaped recovery is possible (where some sectors recover faster but other sectors remain severely damaged). The independent Office of Budget Responsibility will set out its forecast at the Spending Review. However, the Bank of England forecast that GDP will fall by 11% in 2020 instead of 9.5% as forecast in August.
Business investment, already low, may not recover quickly in major sectors like manufacturing, transport, food, and accommodation. Business owners are also concerned about the high levels of debt they’ve accumulated to stay afloat. The ONS recently concluded business investment reduced by 26.5% in the second quarter compared to the first quarter and is still about 20% lower than before Covid-19. Reduced consumer demand and future uncertainty is another factor that is damaging for the ability of companies to pay back debt or invest. One silver lining is that if consumers decide to spend more of their savings instead of hold onto their cash despite job uncertainty, it will positively impact economic growth. The savings rate of households stood at 29.1% in the second quarter compared to the end of 2019 when it was 6.6%.
The housing market has been growing, with rates of 7.5% growth in Oct 2020 compared to the previous year as the stamp duty cut has helped stimulate the market. Whilst it indicates that consumers are spending, housing is only one part of the whole economy. Housing market growth also points to another factor of uncertainty for future economic growth, as more people will reconsider their lifestyle, fresh from the experience of homeworking and perhaps decide to live outside of the city. It’s quite possible that consumers will stick with some of the choices they’ve made after the pandemic ends. Greater levels of remote working will impact office commercial space and the small businesses that drive local economies.
The business models of some companies and industries may also change permanently once the dust settles. Online shopping will be even more dominant. Future Budgets and Spending Reviews will need to take these structural changes into account and create tailored policy solutions to address the loss of jobs and human capital.
As an extension to the transition period is not on the cards, it is unavoidable that there will be extra costs and burdens for business from non-tariff barriers like customs declarations and checks (full import controls won’t be introduced until July 2021). Finally, businesses who have been busy trying to manage Covid-19 are not yet ready for the reality of what will come after the end of the transition period in December 2020. One recent survey by the Institute of Directors (October 2020) found half of its members surveyed were not “fully prepared” yet.
This is the economic environment that many organisations will be heading into during the next year at least. A thorny political issue will be: should tax increases be introduced to reduce the deficit? This is bound to impact some groups of earners, sectors and small businesses negatively. The Institute for Fiscal Studies concluded in October that the chancellor will need to increase taxes by £40billion a year and that borrowing will reach £350billion in 2020. This is a £295billion difference compared to what the OBR forecasted back in March 2020.
Public Affairs teams that take the lead in providing good counsel and provide an early warning system for their Executive teams can make a big difference to their organisation.
There are several actions public affairs teams can take now:
First, be more robust and challenging when articulating risks and opportunities internally. Ensure that internal subject experts and teams are really considering the possible implications of greater political risk. Many organisations will not have had the time to do the deep work to assess if their organisational or corporate strategy still makes sense after the pandemic ends. Provide intelligence and recommendations to help organisations revise their overall strategy and think through future scenarios.
Second, proactively lead the development of policy solutions and messages to help policymakers in the coming months to repair the economy in the most effective way. Explain to internal teams that getting on the front foot is vital to shaping the debate as early as possible.
Third, help and push organisations to prioritise what they really want from the government. Ideally, provide robust evidence and not anecdotes. Decision-makers are going to have limited bandwidth, so organisations need to be very clear about what will provide high impact and value.
Four, prepare your organisation for the possibility of negative political decisions due to some of the tough and unpopular decisions that government will have to take at some point. Those decisions are coming, given the limit to how much the government can borrow before markets get spooked. Ministers have indicated there will be a need to balance the books.
Please get in touch if you would like help understanding the implications of politics in 2021 for your organisation.
Public Affairs Experts - November 17th, 2020