Lockdowns: Entrapment of the Global Economy

BY BERNADETTE SPOFFORTH

You cannot shut down an economy without catastrophic long-term damage. The damage of unintended consequences permeates like the butterfly effect, reaching industries and supply chains not even originally considered. From copper to turkeys, all products are made somewhere, and all services are provided by someone. Those who enjoyed their 18 months of “rest” will blame Brexit for the inflation that hits their pockets and creates shortages in both consumer goods and essentials such as energy – that’s lazy thinking. Whilst there are many knock-on effects from Brexit, by far the bigger shock to the economy stems from both Britain and the world’s response to the pandemic.

Britain is not a silo; its economy is tied inextricably to suppliers and customers worldwide. As every country initiated its own lockdowns and pandemic restrictions, our economy became increasingly fragile. Most didn’t even notice and many still haven’t realised the extent of the economic disaster about to unfold.

The first time most people thought about supply chains was seeing shortages on supermarket shelves and now the fuel crisis has happened, caused in part by panic media – now logistically it’s a very real issue. Yes, a shortage in haulage drivers can in part be blamed on Brexit, but there are driver shortages over much of Europe, the US and even China, these are also attributed to new licenses not being issued because of lockdowns and an upturn in working-from-home habits, just as in the UK where there are 45,000 unprocessed haulage driving licenses sat with a mostly working-from-home DVLA.

Similar situations have occurred all over the world, coupled with many drivers choosing to drive smaller vehicles for companies such as Amazon, for fewer hours, better pay and less responsibility. This leaves an expensive operational problem to deal with and for Britain it’s without the added flexibility of using European drivers – which is why there are fewer shortages of fresh products in the EU right now despite worse driver shortages in some European countries. These shortages of labour will invariably affect prices, as supply and demand always do.

What cannot be blamed on Brexit however is the exodus of workers back to their families in the EU during lockdowns. Wanting to be with their extended families and home communities during a pandemic is entirely reasonable and why should they come back to the chaos in the UK, when their own countries are coping far better?

The increased costs of freight from outside the EU is also nothing to do with Brexit, neither is the shortage of raw materials, or the short supply of finished goods coming out of huge manufacturing hubs like China. They have their own pandemic staffing issues, with factories having to manage with fewer staff and lower production of raw materials. The knock-on consequences are enormous. If businesses in the UK cannot get enough stock, or must pay substantially more for their stock, then prices must go up. If consumers won’t buy at those higher prices, then businesses will fail, they cannot sell at under their cost, putting greater pressure on consumer prices.

In the UK the Bank of England is warning of increasing interest rates to slow price rises, even a GCSE Economics student will tell you the reverse should be true because most price rises are a direct result of increases in the cost of goods and services, some by up to 200%.

The US is suffering from the same hyperinflation in the same sectors, in part because Biden’s unemployment package is higher than the minimum wage, so to get people back into processing and low skilled work wages have increased, which in turn has increased the price of raw materials such as lumber, used not only in construction, but in everyday items such as paper, cardboard used in vast quantities in the packaging industries and of course loo roll. In sectors where wages can’t be increased businesses have closed altogether, leaving short supply situations across a breadth of products and services.

So, interest rates will not decrease prices, they will simply add to the price rises, as the costs of manufacturing increases. Meaning people will have even less money to spend. Already the BoE is alarmed that consumer spending hasn’t reached the levels they predicted earlier in the summer. But for many this isn’t a surprise at all, there is far too much uncertainty around jobs and reinstated Covid measures for consumers to spend wildly on discretionary items. Consumers are instead choosing to hold onto their cash and this trend will continue. They aren’t stupid, they can see fuel and energy price hikes looming and know lockdowns may happen again, leaving many with little or no support from government (note the furlough scheme came to an end this week).

A shortage of labour in the UK poses another set of unintended consequences, whilst Brexit plays its part-  just as with the haulage drivers. Foreign workers went home to be with extended families, why would they come back now with the uncertainty in the UK now? As their own costs of living have increased in their home countries, so has their wage, and there is little financial advantage in returning to the UK. Asking the UK workforce to pick up the slack means huge wage increases would be needed here because of our minimum wage and living wage commitments, entirely justified but the consequence is a further increase in the prices of food and services in our shops, filtering through to hospitality. Interest rate increases won’t stop that, they will simply add to the burden.

And then there’s the investment trap. Whilst money is available from outside investors into many sectors – mostly those able to cash in on catastrophe – I refer to the paucity in availability of investment from business owners in the UK. Why would they invest in their own businesses when the outlook remains so uncertain? Many thousands of companies have already increased their debt by taking government bounce back loans over the past 18 months, they are unlikely to increase that debt to fund growth in what could be a shrinking market, when they have no idea if the government will close their business or impose restrictions once again.

The real shortages are yet to hit the UK. Silicone, plastics, microchips and packaging are all now in short supply, leaving factories and manufacturers with less than 6 months’ supply. Only the businesses paying the most will be able to acquire raw materials if availability of supply doesn’t begin to ease. That means products from swim goggles to toys, to fast moving consumer electricals, will all soon be in short supply. You may think that’s a good thing with “make do and mend” all the better for the environment, but it also means £ billions less revenue coming into UK companies and businesses worldwide, which in turn will result in massive losses and unavoidable forced job cuts. With nothing to sell there’s no profit to be made, with no profit there’s no tax to be paid, or cash to pay staff. That means the UK government will have far less money to invest in their basic responsibilities including the NHS, housing, education and council services. Far less of everything at a crucial time when the country needs much more.

It’s an alarming situation, one of increasing costs for businesses passed onto consumers, be that for services, supply chain or finished products. Furlough has ended, leaving 1.5 million people uncertain of their futures, many will lose their jobs and yes, we have a glut of entry level jobs available, but how many middle managers on £35K a year will take work at minimum wage? Let’s see.

And then we have the public sector, demanding pay rises, better conditions, working from home and all the other trappings of a flourishing economy, seemingly oblivious to the state of the private sector which supports it. Those in the public sector would do well to remember the UK debt mountain is now at over £2 Trillion and without a profitable and growing private sector they themselves are unsustainable.

With talk of tax rises, price increases, shortages and continuing restrictions, sectors such as leisure, hospitality, travel, tourism and high street retail – and the hundreds of thousands of employees in these sectors that supply these businesses –  face a bleak future, with no end in sight. Talk of Galactic Britain sending rockets into space, investment in levelling up, the green economy, net zero carbon industries, seems like just distraction to them, all designed to give the hopeless some hope.

It won’t work this time; people want certainty, not vanity or fashionable projects. The Covid shock to the economy is too great, what we need now are solid contingency plans and this government apparently has none.

The government shut down an entire economy, then mothballed it, in the naive hope it would bounce back to where it was before Covid as if the economy had simply hibernated for the winter. They have failed to look further than protecting the NHS and they have left the rest of the country desperately exposed to a risk far greater than Covid could ever be.

Bernie Spofforth is an experienced Managing Director and investor with a background including board and CEO roles, NASDAQ, FMCG, IP, patents, global manufacturing and the Grey market. You can follow her on Twitter here.