Economic data in the last week suggest the reopening bounce back in spending has been even bigger than expected, at least in lucky countries like the UK that have got their act together on vaccines. Collectively we’ve spent the last few weeks pouring billions of pounds into those grateful hospitality businesses that managed to survive the long months of lockdown.
The boom will continue through the summer at least, but this is just the sugar rush after the release from lockdown. It’s going to take a lot longer until we learn how the pieces of the new post-Covid economy really fit back together. The sea change in habits and technology unleashed by the pandemic will gradually ripple out through all parts of the economy and our lives. That will create winners and losers, and will pose some new headaches for governments.
Let’s start with some simple changes. The great working from home experiment has accelerated the shift towards flexible working by a decade or more. Even when the pandemic is over we now know it works, it saves money, and it makes most people happier — or at least it does in small doses. Most big employers are converging on a mixed model where people will split their week between home and office.
So how many sandwiches, salads or sushi boxes have you bought for lunch this week? Not many I’ll bet. Over time that’s going to mean fewer sandwich shops and salad bars near where you work and more near where you live — plus a bigger online grocery bill. That’s going to be a tough transition for those businesses and the people who work for them. It’s also going to mean less demand for office space and city-centre flats, and more demand for bigger homes with some outdoor space — prices are already adjusting. But this is just the first set of ripples.
The post-pandemic economy is going to create some very tricky problems for our politicians — problems that will be top of the in-tray for the newly elected London mayor next week.
Take public transport. The economics of the Tube and rail network already ran on wafer-thin margins — even small changes in passenger numbers made the difference between profit and loss. The new economy will mean they need to rip up the business model and start again, with much less commuting and potentially more people making less frequent but longer journeys. Public transport operators will have to innovate and get more efficient, for example with new kinds of season ticket, and some of the costs will need to be shared between passengers and taxpayers. That will be politically noisy.
Large parts of the business case for HS2 will also need updating — the benefits from lower emissions will remain, especially shifting all that freight off the roads with more rail capacity, but passenger rail journeys will be lower than before. HS2 could still benefit though if people who’ve chosen to live further from their workplace make more longer distance trips into major hubs like London and Birmingham. For many parts of the country there will be opportunities too, though potentially at the expense of London and other big cities. The economic geography of the UK has been upended — if you don’t need to live close to your employer then why not go where the housing is cheaper and the quality of life higher, especially for families? Many of those left-behind towns have a whole new group of professionals to lure in, which could be a big boost for the levelling-up agenda.
Perhaps the deepest change of all will be in the basic economic contract between government and citizens. The last year has seen the biggest expansion of the welfare state for generations — the Government has stepped in with full-scale disaster insurance, paying our wages and keeping businesses afloat.
It’s happened once so it can happen again — history shows that crisis or war-time interventions have a habit of leaving permanent legacies.
Of course if we’ve all discovered that we’re covered by a new disaster insurance policy then that means the cost of the insurance premiums is just around the corner. The new taxes announced in the Budget should be seen as the first instalment. When we look back on the pandemic in a decade’s time we’ll all remember the year of lockdowns and mourn the lives lost, but the permanent changes to the way we live — many of them still hard to identify — may end up being even more significant.
Rupert Harrison is a former chair of the council of economic advisors and portfolio manager at BlackRock