After the relaxation of many pandemic rules, the UK economy bounced up by 4.8% in Q2 2021.聽聽The uptick was led by consumer services, including hospitality and leisure, as well as some construction and production.聽聽Many households were consuming more and government spending was robust.聽聽In contrast, corporates remained cautious.聽聽Business investment was constrained and inventories volatile.聽聽There was some rebound in exports and imports but not back to pre-Brexit levels.聽聽National output was still 4.4% below its previous peak (Q4 2019).
As the recovery gets underway, spare capacity is being used up.聽聽Already, firms are talking about materials and components shortages, and labour mismatches.聽聽There are important, specific skill gaps, such as for truck drivers.聽聽Companies report recruitment difficulties in filling vacancies, especially for areas that, pre-Brexit, used to be filled by overseas applicants, (e.g. in construction and hoteliers).聽聽Some strong earnings growth is apparent where shortages exist and some consumer prices have leapt higher.聽聽Also, there is a tight housing market (high prices and transactions), with people adjusting to their high savings of liquid funds, post-lockdown demand for more space, and short-term stamp duty incentives.聽聽Finally, there are risks that values in some major asset categories are getting overblown, (e.g. US equities).
Many of these patterns seem to be persisting in Q3, putting upward pressure on prices.聽聽In the short-term, this is led by international commodities and components, exacerbated by shipping and port disruptions.聽聽Then, there are several key supply/demand dislocations and shortages, (such as for some foods and some DIY/repair products).聽聽Import prices are up 10% or so and producer prices about 5% (year to July).聽聽聽Recorded consumer prices are around target (2.1% CPIH, year on year) but this probably underestimates the forces at work.聽聽Even the Bank of England expects 4%+ by year end.聽聽The MPC sees most 2021/22 price increases as transitory, looking for inflation to return to target (2%) by 2023/24.聽聽Given the rapid monetary growth rates, and earnings and materials rises, this may prove hopeful.
What does all this mean for the Autumn and Winter ahead?聽聽With business and households still cautious, given worries about Covid variants and the removal of government support schemes, growth will be positive but insecure.聽聽Globally, there are signs of more subdued growth (after the initial bounce from 2020) in China and the EU and there are fears of an inventory overshoot in North America.聽聽Simply put, there is a lot of uncertainty, confidence is fragile, and market disruptions may be evident in the months ahead.聽聽Even if the headline changes look good, the underlying structures and trends appear precarious.
Ready for the Twenties
As well as the cyclical factors exaggerated by the pandemic, there are some major structural adjustments to make for the medium term.聽聽Post-Brexit trade deals and barriers are one area of concern.聽聽The need to re-orientate investment in energy, transport, technology, and skills, with a view towards limiting climate change, is another.
The twentieth century economy was built on fossil fuels, specialisation of labour and productive and technical efficiency.聽聽鈥楪lobalisation鈥� brought benefits in terms of market openings, higher incomes and living standards for many people across the world.聽聽The full costs of those processes, however, were not immediately borne by those who gained, especially regarding environmental externalities.聽聽Ahead of November鈥檚 COP26 climate change conference in Glasgow, we need to think carefully about the 鈥渨hat, why and how鈥� of economic development as well as specific measures to reduce harmful emissions, stabilise biodiversity and prevent floods, fires and other extreme weather dangers.
奥丑补迟听
A lot has been gained by the pursuit of narrowly defined economic efficiency through the profit motive.聽聽Profit acts as a measurable proxy for value giving a signal to investors, firms, and workers as to where to deploy scarce resources.聽聽It has become clear, however, that such measurements are imperfect, ignoring some accumulated costs that now threaten true global efficiency.聽聽We need to reconsider what it is we value and how we calculate its worth.聽聽What is sustainable economic performance?
Why
This needs a reappraisal of why we do what we do and who we do it for.聽聽For example, how much do we factor in distributions of intergenerational wealth and asset holdings, especially regarding environmental biodiversity, climate costs and natural resource use?聽聽We need to reconsider why we live the way we do and to what end.聽聽What are sustainable living standards for the decades ahead?
How
These 鈥榳hat and why鈥� questions naturally lead us to consider how we will achieve our new goals and aspirations.聽聽Resource allocation, (i.e. economics), remains fundamental to such choice decisions at all levels (individual, household and corporate, and community, regional, national and global).聽聽How do we get from where we are and where we are heading to where we want, indeed need, to be?
Economics optimises 鈥渙bjective functions subject to constraints鈥�.聽聽A re-appraisal of what those objective functions are, beyond the traditions of global capitalism, seems warranted.聽聽In general terms, we probably want to 鈥渙ptimise individual and social well-being subject to environmental and other resource constraints鈥�.聽聽How we break down such functions into specific areas of sector or market detail is crucial.聽
Simplistic hooks like traditionally measured profits and financial cost efficiency need to be broadened to include real values over time, including ecological conservation and health.聽聽Thereby, we may find better and safer ways to live together on this one and only planet.
