Are we ready for the economy of the future?
Covid has delivered a quantum leap but it may prove to be destructive for many of us, finds Tom Rees
The future is arriving early,” declares Bhanu Baweja, chief strategist at UBS. “The lessons consumers, businesses and governments learn... will very likely stick.” He expects e-commerce, artificial intelligence, health tech, cloud computing and automation to all “take a quantum leap” as a result of Covid-19.
If the economy of the future has arrived early, are we ready for it?
What the new normal means for the structure of economies is still unclear. What is clear, however, is that huge tectonic changes are taking place.
Business deals are made on Zoom, e-commerce is a necessity, restaurants come to your door, and newspapers are written in bedrooms. Some existing trends have been flung years into the future while others are opportunities never previously imagined.
But all mean Covid-19 is likely to have an economic legacy more lasting than many had first assumed.
“Many of these are pre-existing forces that will now gain significant momentum, some are newly born, while others are counter-intuitive in today’s difficult time,” says Baweja.
He argues that the education, e-commerce, pharma and online food delivery sectors will be the most positively impacted by accelerating and new economic trends. The aerospace, travel, beverages and luxury industries will be the most negatively affected.
These massive structural changes could see a vast reallocation of resources as certain industries shrink, others are born and workers are forced to follow the money. Some changes will be temporary but lasting enough to shift resources, such as in the tourism and hospitality sectors, while others will be permanent.
“Covid has made a number of activities obsolete,” says Philippe Aghion, a professor of economics at the London School of Economics.
“A lot of firms are going under and on the other hand there is big demand for e-commerce, e-consultation by doctors, etc. Life will change a lot.”
A process of “creative destruction” is taking place where the old is being pushed aside by innovation and new firms that will power the recovery, taking resources with them.
Aghion says the challenge for governments is in the balancing act of protecting the viable firms that would be strong in normal times and allowing the strugglers to fall away,
“You have to help those firms survive but you have firms that are not so viable and you have to make sure you reallocate labour,” he explains.
He believes government intervention is crucial in facilitating the process of creative destruction, ensuring that workers are retrained for the jobs of the new economy.
Covid-19 has also revealed opportunities for more traditional companies.
Businesses have found that many jobs can be done almost as effectively from home as in the office and many workers may be unwilling to return to the pre-virus status quo.
“Any jobs where you sit in front of a computer for 95pc of the day is now a job that can be moved out of the city into the suburbs,” says John
Gathergood, professor of economics at the University of Nottingham. “Think about accountants, lawyers, health administration, head offices, the finance departments of any firm.”
Some of the winners of this crisis will be those that can take advantage of that shift by slashing costs by reducing office space, Gathergood says. He believes that office jobs moving online could also transform the labour market.
“It certainly changes the flexibility with which people can work because location is no longer a key factor,” he says. “It does mean the new normal that we return to might have much less emphasis on cities generally.”
If employees can be equally productive remotely, then their location becomes far less important. If even a fraction move to remote working, that could ease pressure on transport and housing in cities while bringing the need for some typical city services out to the suburbs.
How fast economies adapt to the new normal will depend to some extent whether they are allowed to. Governments, particularly in Europe, have sought to deep freeze their economies with furlough schemes and state-backed loans.
This fiscal bazooka has initially cushioned the blow of Covid-19 on workers and smaller firms but has it held back the reallocation of labour to the new post-virus economy?
The US opted to boost jobless benefits rather than introduce a furlough scheme, allowing unemployment to surge.
But economists at Goldman Sachs believe the North American model has its advantages if the post-Covid economy is dramatically different.
If, for example, demand has shifted from the high street and restaurants to e-commerce and delivery, the US jobs market could be better placed to facilitate such a move. However, Goldman admits the benefits of allowing such a sharp reallocation are “quite limited in practice” and says the cost to move the workers to new employers is still “substantial”. Many of those workers will not be trained for the booming industries of tomorrow.
The move to the post-Covid economy will have as many winners as losers but the transformation risks being most painful for workers.
Gathergood warns the “structural change is happening too fast” for the economy to adapt but hopes the younger workers most affected will be able to retrain for post-Covid life.
“The economy is moving forward 20 years and leaving a lot of people behind – that is going to be the problem here.”