Summary

David explored the shape of the post-pandemic recovery – what David calls a ‘sawtooth’ - explaining that graphic representations of the recovery provide a map through which the effect of the pandemic upon the economy can be interpreted. After displaying a graph of a ‘normal recession’, David discussed how in such circumstances, it can be expected that a ‘very well established’ trend occurs: jobs, wages, and wealth are destroyed, and slowly ‘rebuild’ to the ‘trend line’. He noted at this point that permanent damage, known as ‘scarring or legacy problems’, can occur by which recovery takes longer - as did after the financial crisis of 2008. In the case of the post-pandemic recovery, David explained that through government interventions, such as the UK’s Coronavirus Job Retention Scheme, disposable income did not decline unlike any ‘normal recession’. Instead, disposable income increased (circa. 20%) thanks to the closure of businesses, leading to ‘excess savings’ which has been used in part to pay debts and reduce household debts across all high-income countries. Thus, David suggested that in comparison to ‘normal’ recessions, ‘household balance sheets are in strangely good shape’. Furthermore, unlike a ‘normal’ recession, there was no credit crisis or defaults, so most corporations haven’t made huge losses. Simultaneously, David remarked that investment to replace workers continued despite the pandemic, yet low-value jobs were not reinstated, meaning workers fired from these positions were replaced with automated machines.

The government interventions mentioned above, as David remarked, has led to ‘bloated’ governments, with sovereign debt and central bank balance sheets inflating significantly over the course of the pandemic. Independent Strategy forecasts that central bank balance sheets are set to inflate by 7-10% over the next year despite existing measures to taper their bond purchases. David suggested that resultingly, high-income countries, at least, will possess low productivity, low growth economies in tandem with stagflation for debts to be paid off – which David suggests would reflect the events of the 1970s. In David’s view, the ‘biggest problem’ facing high-income countries is house prices, which are rising at a rate of around 12% per annum and will eventually collapse, as has been witnessed several times before.

In reference to the sawtooth shape of the post-pandemic recovery, David explained how the sawtooth graph represents changes in demand. The sharp points of the graph demonstrate demand shocks which cause imminent supply shocks. As such, David explained that initially, the pandemic caused a decline in demand which eventually grew substantially to normal pre-pandemic levels with the easing of restrictions. Hence, he described how economists understand the pandemic to be a demand shock. As excess demand plugs the gap in demand, it begins to decline rapidly. Thus, a concurrent upward spike in supply occurs. David suggests this has major implications for the economy and presents significant uncertainty to investors familiar with persistent trends of growth. He then suggested that it is important for the service sector to take over from the manufacturing sector as the engine of growth in order to prevent economic contraction.

Following this, David spoke about the global supply crisis. In his view, there is a labour market supply and demand mismatch, and a skill mismatch affecting labour markets. He argued that there are many individuals who, after the period of lockdown, no longer want to re-join the labour force. For example, many Japanese women are discontent with working conditions for women in Japan. David suggested that these mismatches are also evident in the US, with the modest reaction of the supply side to the ending of Unemployment Insurance. David next identified between four and five different concurrent crises facing China, with one crisis taking place in the shipping sector and contributing to the global supply-side crisis. This is of particular concern to the supply side since China supplies 28% of global trade in manufacturing goods. The shipping sector is faced with the compound effect of energy shortages, caused by climate change regulations and skyrocketing coal prices, Xi Jinping’s common prosperity agenda, congestion in surface transport networks, and soaring shipping container prices. These events together are causing global disruption to the supply side and are increasing costs throughout the supply chain.

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