Watch the webinar
Today's webinar took the form of a conversation between two of the CBI’s own: Matthew Fell, our Chief UK Policy Director, and Annie Gascoyne, our Director of Economic Policy. Here are the main subjects they discussed:
- Two metres vs one metre
- What the OECD scenarios meant
- Where demand challenges meet supply challenges
- The CBI’s priorities
- A green, lean economy.
Two metres vs one metre
Yesterday evening, the Prime Minister announced a number of measures to ease the lockdown – including confirmation that outdoor attractions in England, such as zoos and drive-ins, will be able to reopen from Monday.
However, as Matthew pointed out, the debate about social distancing is getting more airtime than many other policy considerations. Should people have to be two metres apart, as now, or one metre apart?
Matthew set out the CBI’s own position: “We’ve always been clear that if two metres makes a material difference to keeping people safe, that should be the guiding light. However, as has been shown in other countries, if you can reduce from two metres to one metre safely, that would make a big difference to the economy and productivity.
He went on to explain just how big that difference might be for different sectors. In hospitality, for example, it could mean 60-70% capacity, instead of the 30% that is currently anticipated. In universities, lecture theatres could start accommodating 200 students instead of 50. The CBI’s role, Matthew added, is to make sure that this sort of “economic evidence” is “married up” with the scientific advice.
But Matthew did add that moving from two metres to one is “not a panacea” – some sectors, such as transport, wouldn’t see such drastic benefits. The policy change, if it happens at all, should be “looked at in conjunction with other measures, such as test and trace”.
The OECD scenarios
Yesterday, the Organisation for Economic Cooperation and Development (OECD) released a set of scenarios for different economies and how they will be impacted by the coronavirus – both without and with a second spike. The UK came out worst of all. In the case of a single hit, the OECD anticipates that the UK’s GDP will shrink by 11.5% this year.
Annie went into the details. The UK is likely to be hit hard, she suggested, in part because of “underlying factors such as the scale of the pandemic here”, but also because of the “structure of our economy”. A lot of British business is “reliant on physical presence in order to do trade” – and so has been especially affected by the lockdown.
But it’s not all bad news. Annie explained that the OECD also expects a relatively swift comeback for the UK economy – a 9% recovery next year, in the event of a single wave of the virus. There are a number of reasons for this, including the anti-scarring effects of the Job Retention Scheme (JRS).
Demand and supply challenges
This brought us to a crucial question: how quickly can demand return once the economy properly reopens? In response, Annie explained just how important consumer confidence will be – and how it may have been affected in new and unique ways by the pandemic.
For example, consider the act of eating out: “If [people] have to sit in an empty restaurant because of social distancing, then that experience isn’t quite as enjoyable – and they’ll be less willing to pay for it.”
Meanwhile, many businesses will run into supply problems at the same time as they face these demand challenges. “Supply chain weakness is still there,” warned Annie – not least because many suppliers have had to close because of reduced demand for their wares.
Annie revealed that the CBI is currently mapping the demand challenges against the supply challenges. When you just consider the former, she said, then the most at-risk sectors are unsurprising – “accommodation, hospitality, retail”. But when you also include the latter, then more sectors look threatened – including “manufacturing” and “transport”.
There is some cause for hope, however. Thanks to policies such as the JRS, said Annie, “people’s personal financial situations haven’t changed much in a lot of cases”. When you also factor in low interest rates and low inflation, it could be the case that consumers are ready to spend in the months ahead.
The CBI’s priorities
The CBI sets out its economic priorities in a letter to the Prime Minister today. Matthew summarised them as:
- Job creation and providing the skills that people need for employment
- Hastening the country’s progress on the “pathway to net zero”
- Measures to boost “competitiveness”.
The first of these, Matthew confirmed, is “the top priority for us” – in part because mass unemployment is likely to be one of the worst effects of the crisis. As Annie explained: “Indicators around business intention on employment remain negative this year. Also, intentions on training have got weaker.”
What can be done? The CBI has also put forward a number of specific proposals for jobs and skills, including: souped-up Jobcentres that work in conjunction with colleges, businesses and other organisations to help train people for work; additional funding, perhaps through a “Future Skills Fund” and a “New Jobs Fund”; and changes to the Apprenticeship Levy so that it is more flexible and more focused on skills.
A green, lean economy
Particular attention was also paid to the second of the CBI’s priorities – accelerating to a low-carbon economy.
Annie described this as a “win-win” scenario. If the government were to invest in cleaner energy infrastructure now, it wouldn’t just achieve that infrastructure – but also construction jobs, energy cost savings for businesses, and more.
There are also ways, Matthew added, in which the government can “take a lead” in this area – for example, by “kickstarting a big national programme to make social housing more energy efficient”.
This led to a more general point from Annie about the balance between government spending and government belt-tightening: “The question is not necessarily to think ‘oh, it’s going to cost this much now’ – but what is the payback later?
“The scarring effects of unemployment will be more impactful on the public finances over the long and medium term than doing nothing at all.”
Key questions we answered:
- Annie, the OECD grabbed headlines with their report projecting that the UK is the worst hit economy out of the major economies. What is your take on that report?
- The OECD’s analysis recognises that the UK’s service-based economy makes it more vulnerable. A lot of our sectors are reliant on physical presence to operate. Plus, the scale of the pandemic in the UK is another big factor.
- However, the OECD’s figures on unemployment show our impact is less severe than in other developed countries.
- As a headline figure, the UK comes worse off, but the OECD also projects that the recovery in the UK will be faster than most in the developed world.
- I would certainly treat the report as a warning, but there is more context beyond the headline.
- Matthew, can you talk us through the main features of the CBI’s recovery plan?
- The labour market is clearly fundamentally different in this country to what we’ve experienced over the last few decades. We are worried about whether there will be enough jobs to go round, so job creation will be key.
- We need to focus on no regret actions. We need to take practical steps right now to make a difference in the medium term, but we need to press on with the long term aims that are consistent with our recovery agenda.
- This involves that pathway to net zero as well as making progress in the digital space.
- We need to kick start the economy through demand stimulus and a competitiveness boost.
- Annie, can we get some more detail on the headlines Matthew touched upon?
- We should think about the recovery in phases. The long term is incredibly uncertain, so we are focusing on the second half of this year and the first half of next year.
- The main message that comes through in conversation with our members is that cash is key. Cash flow will continue to be a theme that runs throughout the rest of this year.
- Consumer confidence unsurprisingly has fallen off a cliff.
- There are also some factors that aren’t factored in economic modelling, such as:
- How concerned consumers are with their own personal safety when returning to retail and other consumer activities.
- How customers anticipate the experience will be, and what the value of that experience is – for example, will people go to restaurants if that experience isn’t what it used to be due to social distancing?
- 65% of businesses said that their activity has been severely negatively impacted by coronavirus. That is the baseline we will be having to recover from in terms of output and sales volumes. And that weakness in demand is likely to persist to the end of this year and the start of next year.
- There are huge capacity constraints on businesses trying to operate due to social distancing. Certain sectors are severely affected by this.
- A lot of firms are seeing an increase in cost pressures and a drop in productivity.
- Finally, the figures we see around investment intentions, training, and business intent to invest and employ are also concerning.
- Annie, do you see any sectors where there is likely to be pent up demand that could propel them forward?
- There have been some sectors that have seen a bit of an uptick, such as gardening centres.
- What is so difficult for businesses is the volatility of the market. For example, as a lot of weddings have been cancelled, and so demand for nice suits and wedding dresses have fallen off a cliff, but those products have already been produced as the orders were placed prior to the lockdown. So, for a business, planning around supply chain needs is challenging.
- A lot of the schemes we have put in place to protect incomes have meant that many have been protected during this crisis. People could start to feel much more confident over the coming months and you may see that being realised in online demand for retail products. But this will depend on consumers being confident in their jobs and income.
- Matthew, you mentioned job creation is a priority. What should we be pushing for?
- This will be the top priority for the CBI.
- Naturally, firms will be focused on protecting the jobs they already have, as opposed to thinking about creating new ones.
- We’ve taken inspiration from recent major company restructurings that have occurred. We had job centres, unions, and universities who rallied around to see whether they could create a compelling retraining offer to get people back in the workspace. In addition, these actors also pushed to see whether employees could be redeployed to other positions within the firm.
- We want to put job centres at the heart of this to get the labour market working.
- An additional future skills fund may be needed. Things like the low carbon, health and digital economy will be in high and growing demand in the future so we will need people skilled and equipped to go into that work.
- We also need a new jobs fund. We know that getting people into temporary jobs is an important step, and those jobs can help people into long-term work.
- Finally, we need to focus on young people. We have some ideas on how the apprenticeship levy could be improved – enabling it to pay wages as well as training. This could maximise young people’s chances to get into the labour market for the first time.
- Annie, what appetite are you seeing in government for a demand stimulus linked to net zero outcomes?
- There is a lot of appetite for this as it is a win-win scenario. If you invest in energy efficiency now, you stimulate construction and manufacturing and services. It also pays dividends in terms of productivity as your fixed costs are reduced, and your margins are then increased.
- We need fixed costs to be lowered and clearly energy efficiency is a significant cost.
- The challenge will be the mechanism to deploy this stimulus. We need to recognise these things have an up-front cost that pay dividends over the long term.
- Beyond homes, you could kick start a programme by improving the regulatory measures on a big and fast rollout of an electric vehicle charging network.
- There are opportunities for the UK to show leadership on the global stage on clean hydrogen production and carbon capture storage.
- Annie, is it feasible that the government could launch a demand stimulus given all it has spent already? And how do we pay for all this?
- The government has already spent approximately £300bn. The best way to get yourself out of the slump is to stimulate growth so that your tax receipts increase. That is the key.
- We need to consider the payback period and how quickly we can recover that rather than focusing on the cost.
- On the levels of debt, we should be concerned about it. However, prior to this crisis, public spending had been brought down so we do have a bit of flexibility now to use those savings to stimulate the economy.
- If we don’t stimulate the economy, the scarring effects of lost employment and supply will be more meaningful on the public finances than us not doing anything at all. We shouldn’t worry about being bold with the stimulus ideas at this point.
- The Autumn is the sensible time to begin to think about the long-term questions and consider where it is necessary to raise taxes. There will need to be tax rises across the board.