by Larry Elliott
Sun 3 Jan 2021
It is clear now that there is a big downside to an economic model that pays little heed to sustainability
There are three characteristics of a “black swan” event: rarity, extreme impact and retrospective predictability. With the benefit of hindsight it is always easy to spot the warning signs of a looming catastrophe, but few see them at the time.
The financial crisis of 2008 was an example of a black swan, and Covid-19 is an even better one. Around this time of the year, economists tend to make predictions of what the next 12 months have in store. Some like to think outside the box and come up with whacky forecasts of unlikely events that will perhaps come to pass.
Suffice it to say not one crystal-ball gazer a year ago foresaw that by December 2020 Christmas would be banned by government edict, pubs shuttered and Premier League football matches played in grounds devoid of spectators. Nobody said 2020 was going to be a plague year that would lead to more than 1.8 million deaths worldwide and bring about the biggest annual contraction of the UK economy since the Great Frost of 1709.
The collective failure to anticipate a variant of the coronavirus first detected in China in late 2019 suggests we should all be careful about making bold statements about what will happen next. Perhaps, as the financial markets are signalling, the mass vaccination programmes now under way will allow life to return to something like normal by the middle of this year. It is possible 2020 will be recorded in the history books as a one-off, an aberration that signified nothing. It is worth remembering how little changed – despite all the confident predictions that there would be a political shift to the left – as a result of the near-implosion of the global banking system in 2008.
There are reasons for thinking 2020 will be different and could eventually be seen as one of those years – like 1789 and 1914 – that prove pivotal. One is that the pandemic has hastened the technological change that was already happening, because social distancing and lockdowns have meant we do so many more things from home via a computer screen or a mobile phone. People have surfed the net more; they have kept in touch with their friends remotely; they have shopped online. The result is that the digital transformation of economies has been accelerated. Companies that went into the crisis powerful enough already – Google, Amazon, Facebook – have seen their market dominance strengthened. Working from home has been terrible for the commercial property sector, but great for Zoom.
For years, there has been talk of how biotechnology would form a crucial part of a fourth industrial revolution. Its response to the pandemic has proved this is not just hype. It has been staggering how quickly vaccines were developed and produced. Genome sequencing has made it possible to identify mutations of the coronavirus.
Running alongside accelerated technological change has been a shift towards bigger states, which have spent a lot more, borrowed a lot more and bossed people around a lot more. Before the crisis erupted, Rishi Sunak expected to borrow about £60bn in the current financial year. He will be lucky if the figure turns out to be less than £400bn. In reality, the chancellor – along with other finance ministers – has had no choice. Governments have taken deliberate decisions to close down large chunks of the economy and so have been obliged to take unprecedented action to prevent mass unemployment and widespread destitution. Sunak talks a lot about how he has a moral duty to balance the budget but is an unconvincing iron chancellor.
Some governments have had better crises than others. Ironically, the country that gave the world Covid-19 – China – is poised to be the only major economy to register positive growth this year. Neighbouring countries – Taiwan, South Korea and Vietnam – were all better prepared for the pandemic than Europe or the US. Recent decades have seen a shift in the global balance of power from west to east, and that trend has continued. The US emerges from 2020 relatively weaker, China relatively stronger. Donald Trump’s hawkish line towards Beijing is unlikely to soften much when Joe Biden arrives at the White House this month.
The story of globalisation over the past three decades has been of developed countries outsourcing production to places where wage costs were lower. Relying on China for PPE and other medical equipment looked a lot less clever as the crisis erupted. There is now a recognition that there is a price to be paid for long and complex supply chains, as there is for an economic model that pays too little heed to sustainability. In the past, deep recessions have tended to push green issues down the political pecking order, but this time it has been different. Quite rightly, the thinking has been that if 2008 was a financial emergency and 2020 has been a medical emergency, then next time – and the assumption is that there will be a next time – it could be a climate emergency.
Understandably, there is a yearning for life to return to normal and when the fight against Covid-19 is finally over people are going to enjoy doing all the things that lockdowns and social distancing currently prevent or restrict. It will be boom time for the high street; it will be hard to get a restaurant booking; low-cost airlines will be running at full capacity. In the short-term it will look like business as usual.
But Covid-19 has forced us to rethink the way we work, how we shop, the role of government, how the economy works at a national and global level. Above all, it has shown us how fragile everything is.