While certain parts of everyday life – such as international travel – remain disrupted, an increasing share of the world is returning to something close to normal and economies are shifting from crisis to recovery mode.
Based on the latest insights and analyses we provide at Cebr by monitoring economic trends on a daily basis, we think there are three crucial areas to watch as the post-COVID economic recovery takes hold – inflation, digitalisation and productivity.
Before exploring these in more detail, it is useful to outline our expectations for the shape and pace of the recovery in different parts of the world.
MACROECONOMIC OUTLOOK
Cebr expects world GDP to expand 5.5% in 2021 after a 3.3% contraction the year before. However, the headline figures mask a varied regional and country-level performance.
The UK’s macroeconomic outlook is especially important for Jersey’s own projected performance, given the many interlinkages between the two economies. In 2020, UK GDP contracted more than in most major economies – by 9.8%.
Thanks to high vaccine uptake rates and the lifting of most restrictions, this year’s bounce back is expected to stand at a strong 7.4%. One factor supporting growth is a rebound in consumer expenditure, fuelled by rising confidence, accumulated savings and strengthened worker bargaining power in terms of wages.
Turning to the Eurozone, the bloc emerged from its double- dip recession with GDP growth of 2.0% in Q2 2021, surpassing expectations and raising hopes for the future trajectory of the recovery. Recent labour market data provides further reason for optimism with the unemployment rate trending downwards over the summer. Cebr expects both 2021 and 2022 to see robust rates of growth at 4.6% and 4.1%, respectively, before moderating down to around 2% in 2023.
In the US, where output contracted 3.5% in 2020, the economy has recovered to its pre-pandemic size with GDP in the second quarter of 2021 standing 0.8% above the Q4 2019 level. After initially being one of the world leaders in vaccine uptake, the rate of vaccinations in the US has since slowed down. Vaccine hesitancy could prove a problem for the US economy as COVID-19 cases have been on the rise since July. Any future lockdown impositions to curtail the spread of the virus are likely to put a large dent in the US’ economic recovery. Still, robust consumer spending and a strengthening labour market lead us to expect growth of 6.5% in 2021 and 4.0% the year after.
China stood out from other major economies in 2020 by managing to avoid a year-on-year contraction. This is largely explained by the country’s strict initial lockdown and diligent border controls which meant that large segments of the economy were able to return to normal levels of output much sooner than elsewhere. Still, Cebr recently downgraded its expectations for near term GDP performance (7.0% in 2021) as slower than expected Q2 growth, high commodity prices and a recent resurgence in COVID-19 cases point to a faltering growth momentum.
While economies around the world are progressing along the recovery path in unique ways, there is also a shared set of features that are evident across different geographies, including those such as the UK and Europe with the closest links to Jersey. In the rest of the outlook piece, we focus on a few of these areas, specifically inflation and digitalisation, as well as the impact on productivity.
INFLATION
The combination of a rapid pick up in demand and various supply shortages has led to inflationary pressures across the UK and Europe. In August, annual inflation in the Eurozone stood at 3.0% – up from 2.2% in July and the highest reading in nearly a decade.
In the UK, price growth as measured by the Consumer Price Index (CPI) stood at 2.5% in June, before falling back to 2.0% in July. We expect this drop to prove temporary and for inflation to average close to 4% over the final quarter of the year. Looking at specific categories, such as hospitality and food shows rates of inflation notably above the headline rate.
Higher inflation, along with other factors such as changing consumer preferences post-COVID, is putting upward pressure on wages. Average total pay is rising at a record pace and although compositional and base effects are somewhat inflating the figure, there is abundant anecdotal and survey evidence which points to rapidly increasing employee costs.
Most forecasters, including Cebr, expect inflationary pressures to prove transient as supply catches up with demand. However, should price rises continue to accelerate central banks may be inclined to intervene with higher interest rates in the coming months.
DIGITALISATION
Accelerated digitalisation is unarguably one of the most visible consequences of the pandemic. Business meetings, conferences, government services, medical appointments, academic lessons and many more previously in person activities have been brought online over the past 18 months as governments, businesses and individuals tried to reduce the number of face-to-face interactions while still getting on with their lives.
While some of these activities will gradually come back offline either partially or entirely as the last of the restrictions are eased, others have been impacted permanently. Among the areas that are changed for the long term are working practices, the provision of services and the utilisation of big data.
The increased focus on the role of technology and an expected uplift in investment, are set to produce tangible economic gains via various channels. Cebr’s work on the topic suggests that COVID-accelerated digitalisation could add 6.9% or £232 billion to UK economic output alone by 2040.
The scale of the uplift could be even greater in regions such as Africa and parts of Asia, where the existing level of digitalisation is lower and there is greater scope for catch-up growth.
PRODUCTIVITY
Higher inflation and accelerated digitalisation both have the potential to nudge businesses into making the types of investment necessary to minimise the dependence on lower productivity jobs. The UK and Europe have quite a bit of scope for this sort of transformation, as it has not already taken place to the extent seen in other economies, such as Japan.
The link between productivity-boosting investment and higher inflation is a somewhat messy one. Businesses facing higher input costs can only pass so much of that extra cost on to customers. Hence, to protect profit margins businesses have an incentive to reduce their costs of production. With labour becoming more expensive, the way to do so will be via investment in productivity-boosting technology.
On the other hand, if inflation continues to accelerate, interest rates will likely rise, becoming a deterring factor for investment. However, we expect interest rates to stay at or near historic lows as policy makers tolerate what is seen as a temporary bout of higher price rises.
This incentive to invest in productivity-boosting technology combined with the COVID-accelerated digitalisation has the potential to raise economic growth across the world, providing a much-needed silver lining after what has been an exceptionally difficult period for many businesses, households and economies as a whole.
