POST-PANDEMIC MARKET SWINGS

Global economic predictions continue to bedevil experts as a host of variables raise their heads. World Bank and OECD have revised their recent projections for the global economy in the coming year. While, on a positive note, the OECD, for instance, increased its growth forecast for 2023 to 2.7 per cent, a slight upward revision from its earlier prediction of 2.6 per cent in March, the World Bank continued with its conservative outlook, making no changes to its March forecast of 2.9 per cent growth for the next year.

However, both institutions had common views on the ongoing effects of monetary policy tightening. This cautionary note emphasizes the potential impact tightening measures may have on the global economy, signalling the need for careful monitoring and management of such policies to ensure a balanced and sustainable economic trajectory.

Unstable Labour Market Scenario

We look at the labour market to get a clearer picture of the economic landscape as it stretches ahead of us into the next year. After all, economic growth requires reallocation across firms and continuous replacement of technologies. The Labour market influences economic dynamism by its impact on a key input, skilled workers for new and growing firms and the re-entrenchment of labour from dying firms for re-skilling for an alternative industry. This ongoing cycle acts as the lifeblood of any economic activity.

The uneven nature of the recovery is also reflected in the analysis of employment data by occupation. High-wage occupations have generally fared better in employment compared to mediumand low-wage occupations.

The U.S. provides an interesting case study to study this subject, even though the American economic model is unique and cannot be replicated in emerging economies like India. However, the trends are important for an analytical study to work out a country-specific strategy.

THE U.S. PROVIDES AN INTERESTING CASE STUDY.

The post-pandemic labour market was clearly seen as the bright spot in the economic landscape. Since reaching its lowest point in April 2020, the economy has experienced significant job growth, adding an estimated 21.5 million jobs. Unemployment rates decreased, and the employment-to-population ratio gradually returned to pre-COVID-19 levels.

However, the recovery shown in the labour market is marked by uneven progress. Sectors like accommodation and food services, which were near total closure during the lockdown, have not regained their pre-pan-

#WFH: THE PANDEMIC CHANGED HOW AND WHERE WE WORK:

E-COMMERCE BOOM: COVID-19 TRANSFORMED HOW WE SHOP AND CREATED NEW JOBS: SUPERSPREAD OF AUTOMATION: JOB TRANSITIONS:

demic employment levels. On the other hand, sectors like professional and technical services and retail trade have demonstrated more favourable outcomes. The uneven nature of the recovery is also reflected in the analysis of employment data by occupation. High-wage occupations have generally fared better in employment compared to medium- and low-wage occupations.

The transition of consumer spending from goods to services, which has been occurring steadily since mid2021, will contribute to reducing some of the disparities in the labour market. However, the presence of inflation poses a significant risk. A prolonged period of elevated inflation or a subsequent recession could have adverse effects on overall employment and specific sectors and occupations. Some sectors and occupations may be more susceptible to these economic conditions’ negative impact than others.

The surge in the labour market, coupled with pandemic-induced shortages, has resulted in substantial growth in nominal weekly earnings. However, rising inflation over the past year has eroded the purchasing power gains for individuals. Nonetheless, the labour market has played a pivotal role in bolstering consumer confidence throughout the past year and continues to uplift sentiment, even in the face of high inflation.

The decline in employment during this period would have been more severe if it were not for robust fiscal support. Since the onset of the pandemic, the federal government has allocated a significant amount of US$6 trillion toward various support programs. It is worth noting that, among the major sectors and sub-sectors within the private sector, couriers and messengers were the only ones that experienced increased employment. This highlights the unique circumstances and demand patterns that emerged during the pandemic, leading to growth in this sector.

Two noteworthy trends have emerged in the recovery process. Firstly, due to the significant decline in economic activity between February and April 2020 and the shift in consumer spending from services to goods during 2020-2021, certain sectors still exhibit noticeably lower levels of economic activity and employment compared to pre-pandemic levels.

Secondly, some sectors have experienced substantial gains during the pandemic, surpassing their pre-pandemic employment levels. Sectors such as professional and technical services have seen an increase in payrolls, indicating higher employment levels than before the pandemic. Additionally, there has been a significant surge in employment within the transportation and warehousing sector, including its key sub-sectors. This can be attributed to the increased reliance on e-commerce as remote work and concerns about COVID-19 prompted a shift towards online shopping.

Out of the 23 major occupations, only one category, namely computer and mathematical occupations, experienced increased employment. On the other hand, lowwage occupations, such as food preparation and serving, as well as personal care and service occupations, saw the most significant declines in employment. This discrepancy can be attributed to the fact that these lowwage occupations could not transition to remote work, making them more vulnerable to the negative effects of the pandemic compared to occupations like computer and mathematical occupations that could adapt to remote work arrangements more easily.

Since the initial months of significant setbacks, employment across all occupations has been steadily recovering. The pace of recovery has been particularly strong for low-wage occupations, driven by the resurgence in certain services such as food services, travel, personal care, and healthcare support as the severity of the pandemic subsides.

However, it is unlikely that the rapid pace of job growth will continue, even if overall economic growth remains robust. This is because unemployment rates are currently low, and the participation rate is approaching pre-COVID-19 levels. However, the main risk to this scenario lies in the presence of inflation. Increasing prices have offset the strong growth in nominal income experienced since last year, diminish ing consumers’ purchasing power.

If high inflation persists, the re duction in purchasing power may compel consumers to reduce their discretionary spending. This, com bined with monetary tightening mea sures, can slow down economic activi ty and impede employment growth.

Moreover, high inflation or a recession could further exacerbate these challenges. It may also hinder progress in sectors and occupations that have not yet reached their pre-pandemic employment levels. This situation is particularly concerning for individuals in low-paying jobs, as they are already disproportionately affected by inflation. A faltering labour market would be the last thing they need.

Overall, the potential consequences of inflation pose risks to employment growth and could disproportionately impact individuals in low-paying jobs compared to others.

Climate And Energy As Spoilers

During the previous summer, global heat waves caused a significant decrease in water levels worldwide, leading to agricultural disruptions, inland transportation, and energy production. The situation was particularly severe in China, where the water level of the Yangtze River sharply declined, resulting in the disruption of hydroelectric and nuclear power generation. Consequently, an electricity shortage ensued, impacting industrial activity and prompting the reopening of closed coal mines by the government.

Unfortunately, China is currently experiencing a similar situation once again. In March, April, and May, the country has been witnessing record-breaking temperatures. On Monday, Shanghai recorded a May temperature record of 36.1 degrees Celsius (96.7 degrees Fahrenheit), joining numerous other cities across Chi- na that have also experienced unprecedented heat in the preceding two months. This has led to reduced rainfall and declining water levels. Additionally, the power grids are facing added strain.

Although China is experiencing the immediate effects of this issue, it is crucial to recognize that it is not confined to China alone. Instead, the global economy is entering a new phase of intermittent disruption, affecting multiple industries, including energy, agriculture, manufacturing, finance (particularly insurance), healthcare, and construction. As a result, governments and businesses are grappling with the need to adapt swiftly to this changing landscape to mitigate the adverse consequences of climate change and foster resilience in these sectors.

Elsewhere in Europe, the economy has been struggling with uncertainty about the flow of natural gas. A major disruption of gas could push Europe into recession. “The world economy is in a precarious position,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President. “Outside of East and South Asia, it is a long way from the dynamism needed to eliminate poverty, counter climate change,

Predicting The Unpredictable

Over the past few decades, the world’s wealth has experienced a significant surge, at least in theory, thanks to the rise in asset prices fuelled by low-interest rates. However, the global financial landscape continues to be susceptible to vulnerabilities, as evidenced by recent turbulence in the financial sector. As a result, the fundamental dynamics of the world’s borrowing, lending, and wealth creation may be on the brink of substantial transformation.

Amidst the current circumstances, one thing is clear: uncertainty has reached an unusually high level. The economic, banking, and investment terrain could undergo significant changes within the next decade, presenting a departure from the landscape witnessed over the past 20 years. However, the future holds a wide array of potential trajectories, where the best and worstcase scenarios depict markedly distinct outcomes.

As part of its continuous research into the global balance sheet, the McKinsey Global Institute has developed four plausible scenarios. The first scenario, termed “return to the past,” envisions a situation where the existing volatility proves temporary, leading to a resumption of balance-sheet expansion. While this may appear appealing to some, it would entail increased risks of economic shocks. Furthermore, such expansion would come at the cost of real economic growth and exacerbate inequality.

In the second scenario, known as the “higher for longer” scenario, inflationary pressures become entrenched, yet worries regarding financial stability lead to a more cautious approach in policy tightening. Demand would remain robust as investments increase to support crucial objectives such as the transition to clean energy, supply chain reconfiguration, and defence. Additionally, the excessive accumulation of savings would diminish over time.

This scenario parallels the stagflation witnessed by the United States during the 1970s, although with comparatively lower inflation, estimated at around 4 per cent instead of 9 per cent. By 2030, the balance sheet would appear relatively healthier in relation to GDP compared to the present, primarily due to inflation reducing the burden of debt and adjusting asset prices in real terms.

The third scenario, referred to as a “balance-sheet reset,” portrays the worst-case situation. In this scenario, interest rates would continue to rise, placing strain on the financial system and potentially leading to failures within it. This would trigger a significant correction in asset values, resulting in numerous debt-financed assets becoming submerged in negative equity. Subsequently, a protracted process of deleveraging and a prolonged recession could ensue.

It is possible that the value of U.S. equities and real estate could decline by over 30 per cent in real terms between the present and 2030. This scenario evokes memories of Japan’s experience in the 1990s, following its real estate and equity bubble burst.

However, there is also a fourth scenario, far more desirable, known as the “productivity acceleration” scenario. This represents the Goldilocks scenario that benefits both economic growth and wealth.

In this scenario, accelerated productivity gains would fuel robust GDP growth, enhance incomes and wealth, and contribute to a stronger balance sheet. Attaining this optimistic outcome would necessitate policymakers in fiscal and monetary domains to carefully strike a balance. While some tightening is necessary to address inflationary concerns, excessive tightening could deplete wealth and trigger financial strain.

The disparity between the best-case and worst-case scenarios, particularly regarding growth and the health of the balance sheet, would be significant.

Assessment

The economic landscape has been fraught with uncertainties, as displayed by the swings in the labour market. The post-pandemic work environment has witnessed many swings involving setbacks and some recoveries. An uneven playing field has developed.

Businesses are confronted with the exceptionally arduous task of formulating their strategies. Merely responding to macroenvironmental changes is no longer enough. Instead, organizations must take a proactive approach by planning for diverse outcomes, identifying indicators that can indicate the emergence of different scenarios, and enhancing their risk management practices.

Climate change poses the next barrier to growth. The global economy is undergoing a transformative period marked by sporadic disruptions that impact a wide range of industries, including energy, agriculture, manufacturing, finance (especially insurance), healthcare, and construction. Governments and businesses face the pressing imperative to swiftly adapt to this evolving landscape. Their aim should be to mitigate the adverse repercussions of climate change and cultivate resilience within these sectors.