HRD Briefing 2021: Economic Update

The second wave of Covid-19 has intensified the economic downturn and delayed the return of output to its pre-virus level. In the UK# this could now occur by the end of 2021 or the beginning of 2022. This economic setback should not be entirely surprising. We have now entered the northern hemisphere’s autumn/ winter period and there was always the risk of a second wave, as experienced with the Spanish flu outbreak in 1918-20. Markets and many businesses probably became irrationally optimistic over the summer months.

But this is not to say that everything is all gloom and doom. Businesses have become much more adept at coping than when the virus and lockdown first struck. This may well explain why global stock markets, although weaker in reaction to news about the intensifying virus, have not fallen further.

Of course, the availability of vaccines is potentially a game changer. But we must beware of becoming too optimistic about that too. Regulatory approval, distribution, the degree of voluntary acceptance and the possibility of nasty side effects are all potentially substantial downsides.

Within the European economy, Germany has done relatively well – at least until recently – while Italy has done appallingly badly. Indeed, although few people are currently focussing on this issue, the economic divergence between northern and southern members of the Eurozone will intensify the dangers of an eventual split in this grouping.

China and much of East Asia have already begun an economic recovery from the virus induced recession. Japan was little affected and is also now recovering.

Widespread criticism of the lockdown strategy has emerged from reputable scientific and economic sources. If the virus persists or returns in modified form, there is a good chance that this criticism will intensify and force a change of tack by many governments, including the British one. Instead, we could see the isolation and protection of vulnerable people and reliance on a degree of self-policing, but a reversal of the lockdown allowing the economy to function pretty normally.

While government deficits have ballooned they haven’t caused problems in the markets or a rise in interest rates as central banks have mopped up the extra debt. What’s more, even if deficits rise substantially from here, it looks as though this will continue to be the case. This approach has even been endorsed by the former guardian of fiscal rectitude: the IMF.

But the danger of inflation in a few years’ time has increased. There is massive pent-up demand and there has been huge money creation by the central banks. It is even possible that governments will come to welcome a bit of inflation as a way of liquidating the debt.

We now have more clarity about the structural changes unleashed by this experience. It has become increasingly clear that working from home has its problems and drawbacks. The Death of the Office has been greatly exaggerated. There is a building consensus that the future will be one in which businesses retain a central office facility but not all workers will be required to go to that office every day of the week. This will pose significant challenges but it will also bring big opportunities in the realms of commercial and residential property, town planning and transport infrastructure.

PRACTITIONER VIEW

The challenge for businesses is to put themselves in the best competitive position to take advantage of the economic and geopolitical trends flagged by Roger and Amelia. Don’t be blinded by the present. In a crisis it is natural to focus more on tactics than strategy, but vaccine availability is a further sign this must shift. HR must help lead.

• Cost structure, cash flow and R&D investment – HR must understand the economics of revised business strategies. Whilst shareholders are being told that it is too early to confirm reliable long-term incentive performance targets, it is by no means a blank canvas for what the financial priorities must look like to be able to emerge in a position of strength. HR must be proactive in the debate on organisation cost, structure and productivity strategy, and plan for the implications.
• Digitalisation and speed to market of new products have been two paradigm shifts that employees in every business must appreciate. But do managers understand the implications and are they ready and able to enable these changes more rapidly? HR must make sure credible plans to address this are quickly put into place. These are two key factors to enable growth and competitive advantage, so HR must be well-positioned.
• Supply chain is sexy. Brexit, Covid-19 and trade wars have meant more focus is rightly placed on this. Whether you are in HR in a global or domestic business, on-shoring will be reviewed, government will want to stimulate more local manufacturing and supply, and have assurance for business-critical supply chains. There may be significant OD implications for your business.
• Business has a vested interest in an equitable society. Covid-19 has further revealed social inequalities. HR needs action plans for more meaningful progress on these – costed and resourced. It is also no longer good enough to deal with diversity as mainly progress on gender, or to deal with disability with minimal expenditure for support and access to jobs.
• M&A. The crisis has revealed strategic weaknesses and opportunities. Activist investors will not sit tight for long. Private equity funds need investing. Informed HR Directors can challenge and ask the difficult questions to defend their businesses, or to support debate on acquisitions. They must also be ready and equipped to execute the deals that are sure to be done.

This article is part of our 2021 HR Directors’ Briefing Paper. Continue to the next article: Technology Trends for 2021.

This article is part of our 2021 HR Directors’ Briefing Paper. Continue to the next article: Technology Trends for 2021.