The uncertainty is affecting and delaying government decisions
As we head towards the slimmed down Spending Review on November 25th - due to the economic turmoil caused by Covid-19 - the consequences of ongoing economic 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 may mean it could be 2024 when this happens in the UK.
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, the mammoth challenge still remains to immunise enough people as quickly as possible. Until then, it isn’t known whether there will be further lockdowns or how long social distancing restrictions will last.
Inevitably, this is going to mean more economic uncertainty; and don’t forget Brexit which may lead to more unknowns for the UK economy over the longer term, given the consequences for businesses from the impact of new regulatory and fiscal barriers to trade, the shape of the final trade deal with the EU (if there 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 the Government 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.
Economic growth, unemployment and Brexit among the biggest challenges
The biggest challenges for the Government will be stimulating economic growth, mitigating unemployment and dealing with any economic fallout from Brexit.
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 before the pandemic. This is lower compared to other major economies in Europe, including Spain (9.1%) Germany (4.3%) and France (4.1%).
The inevitable extension of the furlough scheme until the end of March 2021 will provide a lifeline for many. But during the third quarter of 2020 the unemployment rate rose from 4.0% to 4.8% and including the second national lockdown and furlough scheme extension, is projected to increase to about 6.3% by March 2021.
The end of the furlough scheme in March will increase unemployment, but this will also be affected by the scale of the public health crisis, if it is firmly under control and whether sufficient employment opportunities exist.
Low income workers and youngsters will be the most impacted
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 of having more young people and low income workers with less skills, the drain on human capital and on mental health, means policymakers and communities will be dealing with the financial and emotional impact 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 that are impacted 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.
For young people, evidence from think-tank, the Resolution Foundation shows that whilst all age groups suffer unemployment following a recession or economic shock, young people are hit harder in part as they are less experienced. Recent figures from the Office of National Statistics (ONS) show that during the third quarter of 2020 employment levels were lower compared to the first quarter, with 498,000 job cuts, impacting mostly young people, which accounts for more than half of these cuts (274,000). Compared to the rest of the labour market, a higher proportion of young people are likely to be working in sectors such as retail and hospitality. 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. Added to this, less access to jobs and more time spent unemployed also impacts career mobility and how much young people will earn in future years.
Economic growth will naturally be crucial to the recovery and creating new opportunities for the unemployed. The second national lockdown, whilst less restrictive than the first lockdown, is likely to further damage the pace of the recovery, as may future local lockdowns.
The economic recovery will be uneven across the different sectors
With the UK being an economy 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 (OBR) will set out its forecast at the Spending Review. However, the Bank of England has forecasted that GDP will fall by 11% in 2020 instead of 9.5% it forecast in August.
Business investment, already low, may not recover quickly in major sectors like manufacturing, transport or food and accommodation, and business owners are already concerned about high levels of debt they’ve needed to access 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 around 20% lower than before Covid-19. Reduced consumer demand and future uncertainty is another factor that’s damaging to businesses’ ability to pay back debt or even invest. Economic growth will also be impacted by whether consumers decide to spend more of their savings or hold onto their cash in the face of job uncertainty (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 cuts to stamp duty has helped to stimulate this. Whilst it indicates that consumers are spending, housing is only one part of the whole economy. The growth in the housing market also points to another factor of uncertainty for future economic growth, as more people will consider their lifestyle, fresh from the experience of homeworking and perhaps decide to live outside of the city or large urban areas. It’s quite possible that consumers will stick with some of the choices they’ve made. Greater levels of remote working will impact office commercial space and the small businesses that drive the local economy.
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 a Spending Review will need to take these structural changes into account, including the loss of jobs and human capital, and find tailored policy solutions.
Brexit as an added bump on the road to recovery
And then there is Brexit and the economic impact of a thin trade with the EU or even a no trade deal. A report by Baker McKenzie and Oxford Economics suggests that A No Deal Brexit could see GDP fall by 6% and a free trade deal with the EU would see GDP fall by 3.1%. The report suggests even with a free trade deal, the healthcare sector would be hardest hit, followed by the automotive sector. But, if there’s a No Trade Deal outcome, then the automotive sector will be harder hit.
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 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.
So, this is the economic environment that many organisations will be heading into during the next year at least. The likelihood is also that tax rises will be a thorny political option that the Government will need to introduce to cut 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 £350bn in 2020 (a £295billion difference compared to what the OBR forecasted back in March 2020).
The importance of Public Affairs teams in this uncertain context
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.
There are several actions public affairs teams can take now:
First, be more robust and challenging when analysing and articulating the risks and opportunities internally. Ensuring that internal subject experts and teams are really considering the possible implications of greater political risk. Many organisations will not have had the time 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 that will help policymakers in 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 government (and ideally by providing robust evidence and not anecdotes). Decision makers are going to have limited bandwidth so organisations need 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 there is a limit to how much the government can borrow before markets get spooked, and the government has signalled there will be a need to balance the books.
Get in touch if you’d like help working out what the implications of politics in 2021 might be for your organisation.
By Paul Thompson, UK Director
Public Affairs Experts - November 17th, 2020