The Financial Services Group discusses post pandemic economy, geopolitical shifts and climate change

Financial Services Group brought together an impressive panel to discuss the post pandemic economy, political shifts and the climate challenges.

In December, the Financial Services Group, which I Chair, brought together an impressive panel to discuss the post pandemic economy, political shifts and the climate and sustainability challenges both in the UK and around the world. I was privileged to join Ali Miraj, Political Columnist and Infrastructure Banker; Mary Jo Jacobi, Corporate Advisor and Transatlantic Media Commentator; Jim Pickard, Chief Political Correspondent at the Financial Times and Keith Wade, Chief Economist at Schroders.

Last year the global economy shrank by around 4%, and at the time of the discussion 1.5m people had died from Covid-19 and 500 million people had lost their jobs. Coronavirus has brought at least a temporary halt to globalisation. Inequality has been brought into sharper focus and we are seeing a digital revolution that McKinsey has said equates to five years of change in a matter of months. All this against the backdrop of shifting politics around the world.

Is the relationship between the UK and USA still special?

Mary Jo Jacobi, the former aide to Ronald Reagan as well as the Assistant Secretary of Commerce of the United States under President George H W Bush, believes the US/UK relationship is still ‘special’ but that President Biden may have a different idea as to what that means to days gone by. He has, for example, political similarities to Barack Obama and historically has spoken out against Brexit. However, much has changed in the time since his comments under the Obama administration, and so she predicts that he cannot pick up where he left off.

Equally, Jim Pickard pointed out that there are more parallels between Biden’s values and Boris Johnson’s than you might believe from the press. For example, his commitment to policies to address climate change. Throughout Trump’s administration there was widespread discussion that a UK/USA trade deal would be rushed through because of Trump’s support of Brexit. Biden of course now has a lot on his plate, not least the need to stimulate the US economy. Interestingly, The Economist magazine noted that Boris Johnson was one of the first leaders to be contacted by Biden after his election, which is encouraging.

At the time of discussion the UK’s deal with the EU had not been finalised, which it now has. So too may well lay a more congenial path forward with US relations as well. Whilst the special relationship, and a possible deal, will be politically valuable we must remember that the EU has historically accounted for 60% of UK export trade, where the USA only accounts for about 4%.

Will we still be a valuable ally to the EU?

The general consensus on this was yes, especially on key issues including the environment and defence spending and capabilities. For example, our contributions to defence are far larger than other European nations and our contributions to NATO stand at around 2% of GDP, whilst other European nations fall far below that, averaging 1%.

Who are the winners and losers in the world economy?

At the moment the global economy is in a bad way, but not everyone has lost out. Keith Wade noted that global GDP looks as though it will be down about 4% this year, where in the last recession it fell about 0.4%. We have already mentioned increasing inequality with a lot of job losses being at the lower end of the income spectrum. However, if you look at the markets as a whole the picture isn’t so bleak. Some of the big losers - airlines for example - are already planning for recovery - largely due to the vaccine improving travel prospects.

A number of countries have seen double digit drops in GDP. The UK is one of them at an estimated 11%. One of the winners of course is China, who make a lot of the things that have been in high demand such as face masks, medtech and so forth. The so-called ‘losers’, mainly service sector economies (like the UK) are however, projected to come back and thrive again.

How does the chancellor navigate the political minefield of paying for everything?

Rishi Sunak has discussed a spending review and indicated where the cuts may be, although he is likely to be hoping some things will change in the interim - such as an economic bounce back. Public spending and borrowing over the last year has been on an eye watering scale. The Bank of England can handle that to a point. However, there’s a clear need for tax rises to reassure the markets, and this is likely to fall in areas like capital gains. This of course flies in the face of Conservative values.

After the experience the last few Conservative governments have had, they are disinclined to go for austerity measures. So, will the older generation, who have accrued capital gains in their homes over decades, have to foot the bill? The government has some difficult decisions to make.

What is the likely impact of the vaccine?

The vaccine rollout began with preparations in December and in earnest since then. It has been moving very very quickly, and the UK has been leading the charge arguably, at least in part, because of our exit from the EU which has allowed us to set our own agenda. Since the time of our debate the UK has been getting jabs in people’s arms faster than any other country in Europe.

Do we need to be concerned about China?

There is no secret, and some anxiety, about the inevitable rise of China. The changing position of China in the world will raise security issues, relationship questions, as well as new protocols around international business agreements. Mary Jo Jacobi points out that their national strategic plan - Made in China 2025 - was a big wake up call for the international community. She highlighted that China plays a long game which the US and European leaders cannot play because of elections.

China is set to continue to invest billions this year into their Belt and Road Initiative. Our panel asked: ’Is China using international investment as a tool of foreign policy and what does that mean for the rest of us?’ Keith Wade believes that it is, and that they have made little secret of their ambition to really compete with the West in our own markets.

Jacobi believes the relationships that China is building place pressure on other nations to form an alliance and perhaps adopt a policy akin to Tony Blair’s suggestion of Confrontation, Competition and Cooperation. China has made it clear that they are excited about Biden’s election because they see him as being more friendly towards them than President Trump. They are also heavily invested in American institutions such as the American Basketball Association, which makes them intrinsically involved in global infrastructure. She says that we need to make China realise that they need us too, but that they do have that distinct advantage of being able to take a very long view of things.

Is there a ray of optimism and hope here?

The Prime Minister wrote a green proposal in the Financial Times last year and it’s coming up the agenda quite rapidly. The chopping and changing of the last few years has not helped on the climate change front. However, one thing that Jim Pickard sees as a big success for the Conservatives over the last 10 years, is offshore wind power generation. The next thing we will possibly see is a 2030 target in terms of cutting carbon emissions.

Joe Biden has talked about decarbonising the electricity sector by 2035, which could place pressure on Johnson. However, our panel highlighted that that’s a less tricky goal than cutting energy carbon emissions in general. In theory, if you can get nuclear up and running you can make electricity carbon neutral comparatively easily. Meanwhile, the entire energy sector includes transport and home energy, which requires a truly massive shift. Getting carbon out of the existing electricity system is one thing, but getting it out of energy as a whole is a much bigger target.

What does the green agenda mean for investors and the economy?

Keith Wade commented that while this is tricky, green energy is on the agenda of the two big emitters: the US and China. He says there is a need to raise carbon taxes significantly. Investors, he believes are very keen to find ‘themes’ in the world economy. The environment is one such big theme and he predicts significant amounts of money will go into clean energy often tech companies. He says it has been encouraging to see that investors have been prepared to take a long term view and go in that direction.

Biden has of course kept his promise and re-signed The Paris Agreement on the first day of his presidency, but there are a lot of questions about what they are going to do and how. Mary Jo Jacobi raised a practical question: Where is all this electricity going to come from, because it’s not going to come from wind and rain?

What’s the conclusion?

Brought to us from a really inspiring set of minds, the discussion was insightful and informative. In a short space of time, it gave us an interesting and balanced view of this strange period and what may lie ahead. With much work to do and much to be concerned about, there are also many reasons to be collectively hopeful about the future. If anything, it is a mandate for business leaders to get going.

In their summary philosophical outlook, Jim Pickard pointed out that there is the positive question of the unknown - the things that cannot be predicted yet. Meanwhile, Keith Wade ended by reminding us about the positives of living in an economy in the UK that has been able to take the measures to handle Covid-19. After all, compared to the 1970s or ‘80s when we had the oil shocks it isn’t as bad as you may think, and the world economy did survive that.

In the succinct words of Mary Jo Jacobi: “I think we have a lot to play for in 2021”.