By Professor Marco Mongiello, Pro Vice-Chancellor at The University of Law Business School
Predicting economic scenarios is never an easy, let alone a precise, task. These days, the uncertainty is even greater, bringing us back to levels of unpredictability never seen since WWII. The factors at play are a combination of geo-politics, global health, demographic trends, technology and others. Let’s consider them one-by-one first and then in combination.
The geo-politics of a fragmented Europe tackling a military invasion on its eastern doorstep are straining governments’ abilities to stick to their spending, inflation and employment plans, let alone their commitments to tackle climate change; when the price of food and energy grows uncontrollably due to a war, the delicate balance of central banks’ actions and governments’ policies breaks down.
The effects of the extraordinary governments’ spending incurred during the COVID pandemic, are still very much visible in public debts, as well as in bloated public sectors and clumsy regulations across most of the richest countries.
The widespread ageing of populations in richer countries is skewing the saving habits on one hand and accumulating pressure on the younger generations on the other, raising the barriers to social mobility even higher at the same time as revealing the sad truth that health care systems are by and large not fit for purpose.
Finally, technology developments and the tumultuous growth of fintech have shifted both the landscape and levers that policy makers and regulators can use to regulate the economy, leaving even the savviest investors bewildered about the next reaction of the markets to any shock.
Now, take all these factors together, and the best predictions seem to point in the direction of larger public sectors than liberal societies may like and be used to. This comes with an expectation of higher taxes to finance higher public spending; hence the international markets’ castigation of the UK government’s mini-budget. But why do markets expect the public sector to play a larger role in the economies? Because markets abhor uncertainty, and more spending in defence helps curbing the uncertainty of war, more public money to the poor curb the risk of default of energy and food companies, more financial regulations strengthen the trust in new and highly technological financial market players (which by some accounts churn more money worldwide than central banks). So, more public sector intervention equates to less uncertainty and better functioning financial markets. Except that the risk, far from being completely removed, is partly transferred to the governments themselves, with the consequent effect of higher interest rates of government bonds, which then affect the entire economy – and the less wealthy find it even more difficult to borrow, and more fintech firms are taken out of their low-rates comfort zone – reversing the positive effects of the public spending. You’d be forgiven for suspecting that scenario mirrors those that preceded the advent of populist governments in the past, even among the most established democracies.
This turmoil is bad news for us all in the UK, regardless of personal financial situation, , but is even worse news for our fellow humans in emerging and under-developed economies. Whereas we need to tighten our belts, they start to lack access to food altogether, due to lower supply, higher prices, and shrinking foreign aid.
And yet, alternative scenarios are possible. Behavioural Economics explains many a factor of development, change and innovation, as people’s reactions to crises. Serendipity fuelled by fast changing environment, as well as deeper motivation than that of a marginal improvement of living conditions, are known to have fostered and accelerated innovation. New sectors grow, embracing technology in ways previously unchartered, efforts are redoubled on the quest for alternative sources of energy (maybe no longer for the higher principle of combating climate change, but now as a matter of survival). Investments in new sectors may very well create new jobs, new ways of operating in the markets (we’ve seen it happen when Uber became the largest taxi operator in the world, even though it didn’t own a single car or employed a single driver) and, inevitably, it will require new and more enlightened governments.