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Reality check

While more lockdown restrictions will be eased in England on Monday, Covid-19 continues to affect the lives and livelihoods of people all over the world. Ensuring a successful vaccine rollout remains critical for economic recovery, both at home and abroad.

Newsletter from 14 May 2021

This week, the prime minister confirmed that the next easing of lockdown restrictions in England will go ahead on Monday. With the number of vaccine doses administered climbing steadily and case rates as low as they were last summer, there is some optimism in the air – at least here in the UK.

But as the public health crisis slowly subsides, the economic impacts left behind are becoming clear. According to the latest UK data, 4.9 million people are still on furlough, with a further 1.7 million unemployed. And this week, the Office for National Statistics announced that the economy shrank by 1.5% in the first quarter of 2021, and GDP is now 8.7% below where it was before the pandemic.

Faced with these contrasting trends, economists can help to clarify what is happening. Will the economy bounce back, as people who have had little opportunity to spend return to shops, pubs and restaurants? Or will long-lasting harm brought about by Covid-19 forever alter how we live?

This week at the Economics Observatory, several articles have explored these concerns. At a time when finding answers has been deeply challenging, we believe that asking the right questions is a good place to start. You can ask us one here.

Testing the connection

In a New York Times column back in April 2020, economics Nobel laureate Paul Krugman lamented that ‘the stock market is not the economy’. At the time, US share prices were surging even as the economy was in disarray. This week, we revisited this phenomenon: why is it that the ups and downs of the stock market often don’t reflect the wider economy?

Gareth Campbell (Queen’s University Belfast) highlights how share prices often fluctuate far more than is justified by what is happening to the company in question. For many, this heightened volatility is a reason not to trust the stock market as an accurate predictor of the real economy.

And yet, when looking at historical data, Gareth points out that previous asset price changes have been a fairly good indicator of economic growth. Before 1913 and in the period up to 1945, asset price returns explained an average of about 22% of GDP growth, rising to 32% by 1976 and up to 38% thereafter.

But Gareth rounds off his piece with some words of caution, reminding us that the predictive power of the stock market remains far from perfect. Over the past year in particular, there has been considerable price volatility, suggesting uncertainty about the future. As the standard investment warning says, ‘past performance is no guarantee of future results’.

Better pay

For many people, the pandemic has brought worries about their personal finances. The risk of being laid off – or even dropping down to 80% furlough wages – is a serious threat to the ability to stay afloat, particularly for those already paid the minimum wage.

On Tuesday, we posted a piece by Andre Couture (Bristol) on the potential effects of the recent increase in UK minimum wages on jobs, work and pay. Andre points out that the pay rise will be positive news for people currently working in minimum wage jobs. This is particularly promising for 23-24-year-olds, whose wages could increase by up to 9%. And given that young people have consistently borne the brunt of the pandemic, this news should be welcome.

But again, the reality is slightly more complex. As Andre highlights, sectors that employ a larger share of low-wage workers – such as hospitality, retail, and cleaning and maintenance – have been hit hard during lockdown. While minimum wage rises are encouraging, if there are fewer of these jobs out there, young people will continue to struggle.

Tightening the commuter belt

Another way in which people’s working lives may change relates to how often they travel to work. Prior to the pandemic, over 70% of workers were commuting to their jobs on most days. As highlighted in a new piece from Paul Mizen (Nottingham), Nick Bloom (Stanford) and Shivani Taneja (Nottingham), the pattern is changing.

They explore the future of commuting, using survey data to evaluate people’s travel preferences. As of April 2021, around half the UK labour force was working from home. Looking forward, the data suggest that most employees expect to be away from the office two or three times a week, even after lockdown is relaxed.

'How often would you like to commute to work after Covid-19?'

Notes: Data are from two surveys of 5,000 UK residents carried out by Prolific in March and April 2021 on behalf of the University of Nottingham and Stanford University. The authors reweighted the sample of respondents to match the Labour Force Survey figures by age, gender and education.

For all the conversations about getting back to normal, it appears that some things may never be quite the same again – at least in terms of the commuting habits of UK workers. And as Paul, Nick and Shivani stress, these changes in attitude will have wider economic impacts, affecting the transport industry, workplaces and the future of cities ­– a topic we have explored in depth before.

Market forces

Any chance of permanently emerging from lockdown has rested on the development of effective vaccines. When the news broke late last year that several jabs had passed clinical trials, it felt like there was a collective sigh of relief. Hope, however dim at first, flickered at the prospect of being able to beat the virus.

Yet the market for vaccines is a wrinkle in this story. Vaccines have become a fiercely contested resource, and the rise of a new phenomenon – vaccine nationalism – is a concern

On Thursday, Flavio Toxvaerd (Cambridge) and Anthony McDonnell (Center for Global Development) highlighted the complexity of the vaccine market. They explain that the production of vaccine technology rests on an intricate market structure, combining both the public and private sectors. Crucially, the market is highly concentrated on both sides: not only are there few firms that produce vaccines, there are also relatively few buyers.

This means that despite representing only 16% of the world’s population (and under 6% of global deaths from infectious diseases), high-income countries account for 82% of the global vaccine market. Flavio and Anthony warn that this uneven structure has skewed the market towards serving people in parts of the world where the need for jabs is lowest. As the horror in India continues to unfold, it is questionable whether vaccines are really helping us to beat coronavirus at all.

One response to the rising case numbers in South Asia has been a call for patent restrictions on the Covid-19 vaccines to be waived so that low-income countries can produce doses for themselves. In our final piece this week, Flavio has teamed up with Michele Boldrin (Washington University in St Louis) and David Levine (European University Institute) to explore the likely impact.

They conclude that patent waivers are likely to have little effect for good or ill. It’s not intellectual property protection that’s holding back vaccine production and distribution to poorer countries. The big problems are a lack of scientific know-how, manufacturing capacity and the political will across the international community.

Observatory news

  • Next week, we will be publishing another series of themed articles. Put together by Economics Observatory founder and lead editor Rachel Griffith, these will focus on increasing food insecurity and obesity, particularly among children. This trend raises concerns for their futures, in terms of health, education and long-term prospects.
  • We are publishing the first edition of our magazine later this month. If you haven’t done so already, sign up to receive a free copy here.
Author: Charlie Meyrick
Photo by Ketut Subiyanto on Pexels
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