Professor Catia Montagna is among a group of experts who contributed to a recent article published by the Fraser of Allander Institute discussing economic perspectives and the impact the Coronavirus has had on our economy and society. You can read the full article here
Professor Montagna's contributions can be found below:
1. How do you view the immediate outlook for the economy over the next 12 months?
The immediate outlook for the economy appears challenging.
The impact of the COVID-19 crisis has already been substantial – a contraction of the UK economy by over 20% in April, firms in Scotland reporting drops in turnover in most sectors, an increase in unemployment despite the furlough schemes which have protected jobs (and the employment status of those affected) – but the crisis is not over yet. There still is a lot of uncertainty, both on the health front and in how the economy will respond.
I do not have a crystal ball, but I am pessimistic about the speed of the recovery. Some analysts argue that because the crisis was triggered by a ‘temporary’ non-economic shock, otherwise solid firms and sectors will recover quickly once production can restart, particularly in light of the unprecedented government support that was put in place.
But the sharp and short V-shaped recession/recovery predicted by many (e.g., Morgan Stanley) assumes that activity can restart quickly as restrictions are relaxed. Crucially, this requires that the COVID-19 crisis does not have long-lasting ‘structural’ effects on the economy.
I am not sure that will be the case. Some of the changes we are witnessing will compound the effects of other processes already in action (such as automation, Brexit/protectionism, developments in the oil and gas markets) and result in inevitable structural changes in the economy. These are not necessarily all going to be negative and will also give rise to opportunities, but adjustments will take time and will be accompanied by potentially highly disruptive dislocations in labour markets. I think the employment effects of the crisis are yet to be fully felt: many businesses, particularly small firms, may not be able to survive the lockdown and many others will have taken the opportunity to restructure and scale down (as is happening in Oil and Gas).
We already see a dramatic drop in vacancies that will make it hard for displaced workers to find jobs. This is bound to have a negative knock-on effect on consumer spending, with a contraction in aggregate demand, and on firms’ and investors’ outlook.
2. What permanent changes to our economy do you see emerging from this crisis?
The way we’ll live and interact socially and economically is not likely to go back to the ‘old normal’ quickly and this may well translate into ‘cultural change’ – e.g. in the way we see work and perform/organise our jobs, or in the type of goods and services we buy.
Alongside this, the international organisation of production may well change forever. In the last decades, international openness has been key to growth, but amid this crisis and the protectionist stances that we are witnessing, it will take time to go back to pre-crisis levels and, crucially, international production chains will shorten posing both challenges for productivity and opportunities for a rebalancing of the economy in Scotland.
But I think there is more than this at stake. The COVID-19 crisis has deepened the fractures of our ‘economic model’ exposing, in particular, the interconnectedness between the ecological crisis and the socio-economic inequalities that characterise today’s capitalism. Addressing these fault lines is a great challenge, but it is also a great opportunity to find transformative solutions. Which takes me to the next question
3. What should be the top priority areas for policymakers at this time?
There are a number of obvious areas that need to be central to policy making now and in the aftermath of this crisis.
Health needs to be invested in and recognised for what it is – a public good. The unpreparedness of our health system in the face of something that was heavily expected is difficult to come to terms with. But health goes beyond the narrowly defined health system. It depends on ‘good’ and secure jobs, the quality of housing, social services and a clean environment.
There needs to be a strengthening of social insurance – so far, the emphasis in policy intervention has been to protect jobs by propping firms up. But structural changes may mean that some jobs will need to disappear and then it may make more sense to protect workers and their ability to move across different sectors. Clearly, central to this will be education and training.
Fundamentally, there needs to be a rebalancing of power in the industrial relation system alongside a quest for better jobs. Many of the dire consequences of the crisis on households (and the associated costs in terms of policy intervention) would not have occurred without the level of economic insecurity and in-work poverty that has characterised developments in labour markets in recent decades.
The nature of international cooperation also needs to change, putting at its centre health and the environment.
So, we can ‘build-back-better’. But we need to go beyond reforming our policy agenda. There needs to be a change in the paradigm that drives it. Currently, the most enlightened policy strategies talk about ‘inclusive and sustainable growth’. This means posing inclusiveness and sustainability as ‘constraints’ to growth: they should not be constraints but objectives. Only by setting them as the objectives of policy, shall we be able to identify the ways in which what to ‘produce’, how to produce it, and where investment should go should change. Moving from ‘constraints’ to ‘objectives’ is not a subtle academic distinction. It requires a fundamental change in culture – and a new social pact capable of ‘internalising’ the consequences of policy and private decisions on society and the environment.