The future is not what it used to be

James Wallace │26 March 2020

Nations around the world continue to make gradual steps towards re-opening economies and societies. Governments, industries and households are learning to balance public health and wellbeing, on the one hand, and economic activity and freedom of movement, on the other. Temporarily, a state of tension between these mutually reinforcing societal goals has emerged. We are learning ways to balance both in harmony. People are highly adaptive by nature and will – through cooperation and innovation – make this next normal work for as long as is required. And we may well develop some lasting behaviour changes along the way.

One of the enduring lessons from this shared global experience is to remind us how mutually dependent we all are for our shared prosperity and existence. Some believe it provides the impetus for a kinder form of capitalism and a realignment of social values in which businesses, first and foremost, exist for the wider good of society. These goals need to be aligned with shareholder and investor value. The pandemic has hit the poorest and most vulnerable hardest and shone a bright light on the inequality of reward for frontline ‘key’ workers – between their market value and social value. These key workers have saved our lives and kept supply chains moving. Often, these most vulnerable population groups in society are also those with the least social insurance: with little to no savings and employment protection. All of which makes plain that some things need to change.

One eye on the crises to come

We do not need hindsight to know what is likely to happen if lessons are unheeded again. History cannot be allowed to repeat itself. Following the global financial crisis 12 years ago, the least well off suffered the most, and for the longest, while the most affluent working in lucrative sectors quickly returned to creating new wealth for their companies, and themselves. As we recover from this pandemic, we must remain vigilant about the consequences of social inequality left in Covid-19’s wake. We must also ensure we learn all we can to prepare for the crises to comes: from future pandemics to tackling global wealth inequality and climate change. Whether Covid-19 can be used to advance the agenda of greater global pandemic preparedness, wealth redistribution or environmental responsibility is something we need to think about.

Covid-19 and climate risk

Climate change will be a defining global emergency for the coming decades. The pandemic has reminded us that climate risk – defined as the probability of a climate-induced event and the consequences of an adverse event – is not some theoretical event which might happen to future generations. As we are experiencing, once in a century crises do happen. The reality of climate risk is already evident to us, from extreme weather events such as Australia’s deadly bushfires in January to seasonal flooding in rural England and Wales.

By comparison, Covid-19 is a crisis of contagion, while climate change is a crisis of accumulation. The former is rapid and propelled by a vastly interconnected planet through global supply chains and mass international travel, the latter invites complacency due to its slow-moving insurgency, but the impacts will be felt in global economic activity, health and mortality, ecosystems and biodiversity, water purity, famine, population displacement and migration, political stress, conflict, and species survival. Climate risks will affect everyone in the end, unlike Covid-19, which some appear immune from its deleterious effects. The challenge is how to incentivise the employment of capital into environmentally beneficial ways. Covid-19, in many ways, is a dress-rehearsal for more grave challenges to come. The more social lessons we learn from this crisis, the better we will fare in those ahead.

New economic order: less global, more digital

The world economy will soon look quite different. Global supply chains will diversify, de-risking from a concentrated dependence on China, and become more local. The impact on trade will be significant which will provide opportunities for nations and economies to reinvent themselves. Global supply chain reorganisation is partly in response to the pandemic, partly in response to the broader challenge of automation and partly a strategic goal to build in resilience from the possibility of future trade wars. Southern European nations, which have been among the worst tormented by Covid-19, may consider further investment into logistics, automated manufacturing and warehousing, robotics, etc, to meet European demand for more regional and local supply chain alternatives.

Inevitably, the pandemic will result in much higher government debt levels which may lead to higher taxation on corporates and households. Higher taxes on the super-wealthy may well follow. Interest rates will also remain low for years to come. As we become less global, we will also become more digital, further accelerating de-globalisation and digitalisation – a pairing that many had assumed would have propelled economies and societies in the same direction. While digital adoption will increase, it will do so unequally. For example, clothes stores, bank branches, business and higher education institutes will likely embrace e-commerce, fintech, videoconferencing and e-learning more, while the sharing economy may retrench. The implications for sharing economy sector titans, such as WeWork, Airbnb, Grab and Uber, will depend on the how long we live with Covid-19.

Dr Anthony Fauci, the US infectious-diseases expert, told a Senate hearing last week that there are at least eight candidate vaccines in development, with safety and efficacy results trickling in from late autumn, early winter. Ultimately, the degree to which economies remain in hibernation, or semi-hibernation, which also relies on the confidence of populations to return to work safely, will dictate so much of the trajectory ahead. For asset prices, including real estate, the recovery will correlate with the macroeconomy. As nations and economies emerge from hibernation in the coming weeks, investors will try to determine how much demand loss is temporary versus permanent; the answers will undoubtedly vary widely by sector. This crisis will have an end and economies can and do come back. But the future is not what it used to be.

This article was first published in Real Asset Insight.