The Covid effect of the economy will be over by spring, but it’s only a temporary respite

We are finally in front of the music. For two years, huge shocks to our economy were masked by huge government spending, money printing and lockdowns. Now as we emerge, we stagger like a patient who has been in bed too long and finds that she has a dead leg.

The big question is whether it is just a tingling sensation or a permanent loss of function. The government is relying on the former, as Minister of Economics Kwasi Kwarteng put it in an interview with Conservative Home: “This is a transition period.” He predicted that it would be over within a year.

Some prominent economists agree. Goldman Sachs, for example, recently forecast that the supply crisis will peak next spring. We are not entering a dreaded cycle of stagflation of inflation, wage increases and recession. This is just a post-covid effect.

The most compelling evidence of this position is the fact that factories produce more, not less. In other words, supply chains haven’t collapsed. You are producing more than ever. The problem is that demand for goods shot through the roof last year when consumers were locked up at home and cash was piling up.

All of this extra production has resulted in congestion and labor shortages, which in turn has led to delivery delays. The queues at gas stations have their global equivalent in the queues of cargo ships waiting to enter ports, warehouses so full that they can no longer be stored, and tankers with no men to drive them. This is not just a UK phenomenon. Empty shelves are destroying supermarkets from Brussels to Sydney and Los Angeles. More than 70 mega-ships are anchored in San Pedro Bay, California, waiting to dock.

The good news is that as the world reopens, we will return to old habits. Demand will shift again in the direction of services, which will relieve the global congestion of goods. After a dizzying winter, the worst of the supply crisis should be over.

But that’s not the end of the story. As Mr. Kwarteng implicitly admitted, the economy has changed permanently. The danger is that we fail to adapt and instead reject it. The scenario is easy to imagine. High gas prices and labor shortages lead to an inflationary spiral. Investors dump UK assets. In the worst case, the Bank of England will have to raise interest rates and an increase in government borrowing costs will force Great Britain to make massive tax hikes and spending cuts. It’s time to start planning for the 2022 recession, says Gavekal Dragonomics.

In fact, several trends that favored the British model have now reversed. Gas prices are skyrocketing after being largely subdued for a decade. Immigration has decreased. Covid and rallies in euro countries have drawn workers home, while Brexit has purposely made it difficult for companies to lure them back. The finely tuned supply chains that bring goods into the country have previously been an efficiency. The Covid shock shows that they are also a burden.

In addition, not all bottlenecks will go away quickly. Even before Covid, there was a threat of a shortage of semiconductors (small electronic chips). Since then, shutdowns and the Sino-US trade war have exacerbated it. Electronic device manufacturers, from telephones to automobiles, are at the mercy of chipmakers and need time to ramp up production. In other areas we have seen the folly of relying on China for so many goods. Washington has banned its companies from working anywhere at high risk of forced labor, such as in Xinjiang. Beijing, on the other hand, has banned its companies from complying with foreign dictates. These two things are not entirely compatible with sprawling multinational supply chains.

Meanwhile, labor shortages are already reportedly affecting wages. Truck drivers are overwhelmed with job offers and “golden hellos”. In Newport, new Asda employees receive a bonus of £ 1200, according to South Wales Argus. In the southeast, the East Anglian Daily Times saw advertisements for drivers offering salaries of up to £ 60,000 a year. No doubt employers will complain, but a pay increase is overdue. UK truck drivers’ wages have fallen in real terms over the past decade and are 30 percent lower than in Australia, where employers have struggled with bottlenecks for years.

The risk, however, is that wage increases will boost inflation. Rising wages are only sustainable if they induce companies to invest in technology or training that will improve their productivity. In Australia, that meant building autonomous trucks to move stones around iron mines. This is obviously not an immediate option in the UK, but if the government can avoid getting in each other’s way, more UK businesses should be able to find new ways to deal with fewer workers by using the systems of the most competitive Copy businesses like supermarkets. Economists have been concerned for years about how many UK companies fail to adopt new technology from leading companies. The incentives for managers to fix this are getting much sharper.

For its part, the government urgently needs to shake the system and help the economy adapt. The dissolution of this week’s vacation program, which paid over a million workers, could prompt companies to lay off employees and allow them to fill workforce gaps elsewhere. The public sector, be it schools, doctors or the DVLA, must immediately resume full service so as not to burden the economy, which could lead to a fight with the unions.

If we do not want the number of frostbite victims to rise this winter, the budget must also include aid for those who are suffering from the consequences of the ineffectual energy policy of two decades. The Ministry of the Interior has already relaxed the visa requirements for truck drivers. Even if the system succeeds in attracting workers (which is doubtful), it should have a clear timetable so that companies do not simply assume that the old supply of unlimited labor will remain.

In general, the government needs to end five years of Brexit worrying about what exactly our economic model will be so that companies can spend money on adjustment rather than “waiting”. Are we actually going to build a new fleet of nuclear power plants? If so, how? Will new science funding and training really change the UK economy, or just another empty announcement? Still not having the courage to revise the dysfunctional planning system?

For now, the plan is clear to be firmly in place. With luck, the worst of the crisis will be overcome without starting a spiral of layoffs, inflation and poverty. The problem with politicians is that after the crisis, their urge to do something about the next one also disappears. But this winter should be a warning. If you sit still for too long, a dead leg turns into a permanent limp.