The Long Shadow of Covid: Navigating the Confluence of Crises
The political and economic aftershock of the pandemic, energy price increases and interest rate rises
A quick one this week as I’ve been on holiday but I wanted to expand on my response to a Post from Dr John Rutledge about the combination of crises over the last few years and how we may only be now starting to see the economic and political impacts.
The narrative surrounding the pandemic often paints a picture of a distinct beginning and end. We emerged, bruised but seemingly intact, ready to pick up our pre-pandemic lives. However, from a policy standpoint, there was no clear end to the pandemic. We may have moved away from lock down announcements by Boris Johnson and nightly updates from Chris Whitty but the pandemic's repercussions are far from over. Given global economic and political problems since it may be that their true magnitude is only beginning to unfold.
The main action during the pandemic was an increase in government spending. The fiscal interventions used to mitigate the pandemic's impact, from stimulus checks to business support such as furlough, were unprecedented.
These measures, while necessary, have left a substantial legacy and governments across the world are now grappling with ballooning public debt. This is the challenge substantially influencing Rachel Reeves’ Spring Statement recently. The challenge of either reducing government spending or increasing revenue, a delicate balancing act, will continue to be on the mind of the UK Chancellor and other finance ministers around the world for years to come.
Beyond the impact on public finances it will be essential to to continue to consider the personal finance impacts. Many households relied on government support through the pandemic, the energy cost crisis and interest rate rises. As the impact of these multiple "emergency" measures continues to fade, the underlying financial vulnerabilities will become increasingly apparent. The delayed impact of job losses, business closures and increased debt burdens could still lead rising defaults, reduced consumer spending, and a general erosion of financial stability.
Beyond the pandemic the economic landscape of recent years has been further complicated by the energy price shock and the rise in interest rates. The combination of these factors has created a perfect storm through inflationary pressures and slower economic growth.
The surge in energy prices, driven by geopolitical tensions and supply chain disruptions, has significantly increased production costs and the amount consumers are having to spend on essentials. This has led to reduced spending on non-essentials like meals out, holidays and spending on clothing.
At the same time interest rate increases have also made borrowing more expensive, impacting investment, housing markets, and overall economic activity. Many households will have had to deal with higher mortgage payments and renters are having to deal with the impact of interest rate rises on landlords.
The result is a complex, multi-layered political challenge that demands new thinking round the appropriate policy response.
What does this mean for policymakers?
Fiscal prudence: Governments are having to introduce sustainable fiscal policies, gradually reducing debt levels while safeguarding essential public services.
Targeted support: As the impact of emergency policy measures has an impact, targeted support for vulnerable populations and sectors is crucial to mitigate the social and economic fallout.
Structural reforms: Addressing the underlying structural weaknesses exposed by the pandemic, such as supply chain vulnerabilities and lack of pandemic planning are essential for long-term resilience. Structural issues which have held back economic growth also need to be removed immediately. The UK Government’s focus on removing bureaucracy from the planning system is a key example of this
International impacts: Trump's decision to impose tariffs shows that we may be moving into an era where international cooperation is not the default it has been for the last few decades. How does a global economy compete with political demands in individual countries.
We know the impacts of major global crises are long lasting - the UK’s Second World War debt was only finally paid off at the end of 2006. The road to a new and successful economic normal will be long and arduous. It will require fresh thinking and new approaches to policy delivery and difficult political decisions (for example maintaining benefit payment levels vs reducing government spending). Governments are facing difficult decisions that will impact for years to come.