In the case of almost all kinds of economic, social, political or health-related systemic shocks, the vulnerable are the most severely impacted.
We know a great deal now about the susceptibility of particular groups in our population to the Covid-19 virus, the elderly and those with pre-existing conditions relating to heart and lung functions. But the economic shocks will be significant and will disproportionally affect low-skilled workers and low-income households, regardless of whether or not they contract the virus. A recent headline stated that there will be more bankruptcies than deaths from the Covid-19 epidemic. This is not to diminish the importance of the personal losses being experienced, but to point to the additional risks faced by those who have the least in our society.
A Harvard Business Review article (Carlsson-Szlezak, Reeves and Swartz; 2020) recently described epidemics as following a V-shaped trajectory in terms of economic decline and growth. A sudden drop in production and consumption severely impacts economies, but only over a short period, followed by a steep bounce-back. OECD global growth forecasts for 2020 have almost halved from 3% to 1.5% and could drop further. The stock markets are faltering and businesses are experiencing huge levels of financial uncertainty and beginning to shut down certain operations as a result. JP Morgan’s recent economic analysis of the UK suggests a drop in GDP of -10% in Q1 and -30% Q2 but up to 50% increase, potentially in Q4 resulting in a net fall of 0.8% GDP growth. In the case of Covid-19, these are blunt estimates, with little precedence.
The two major economic contagion or transmission effects come from a fall in net revenues for firms and unemployment. The first results from increased (supply-side) costs and declining (Business to Business and Business to Consumer) consumption. The second from the response of firms to these economic conditions, to reduce costs by laying off workers. In combination, these will stall the dynamism of an economy. But unemployment then transmits these economic effects from vulnerable (in debt) firms to vulnerable (in debt) households. This form of contagion has further knock-on effects on the benefits system, healthcare, housing, crime, mental health and the well-being of communities. For these reasons, it is important to understand which firms are likely to impacted by the evolving Covid-19 crisis and to channel government funding and support as precisely as possible to the right places.
A great deal of the Brexit analysis undertaken to understand the effects of a hard-exit from the EU provides insights into the current disruption. We are one of three UK regions with the highest level of risk exposure to a hard-Brexit because of our trade dependencies with Europe. 12.2% of West Midlands GDP is at risk because of negative trade-related consequences.
We also have a low level of average household income (second-lowest GDHI of the core cities) and over 107,000 households are workless, with dependent children. The Index of Multiple Deprivation shows that 56.4% of Birmingham’s population live in the most deprived 20% of areas in England. Not unrelated to our regional exposure to Covid-19, Birmingham’s Health Profile Report (2019) reveals that for 2013-15, life expectancy in the most deprived areas in Birmingham was 10 years lower for men and 8 years lower for women than in the least deprived areas.
The key industry sectors impacted in the West Midlands mirror the pattern nationally, but we are particularly exposed for four key reasons:
Our large manufacturing sector and local supply chains
The automotive industry is worth just over £8 billion to our regional economy, directly and the components supply chain adds another £3.2 billion. Already in difficulty from declining sales in China and from Brexit the outlook for these firms does not look good as production is disrupted, costs increase and demand falls. The regional multiplier effect is significant as lots of regional income and consumption is dependent on the industry. Moreover, many small firms in our manufacturing supply chains are so-called ‘zombie’ firms, surviving on low-interest loans.
Vulnerable ‘zombie’ companies
Firms that survive by paying off the interest on loans have been described as ‘zombie’ companies, vulnerable to bankruptcy if costs or interest rates rise or demand falls (11% of UK firms pay the interest on their debts but do not repay any debt; Banerjee and Hofman, 2018). They tend to be smaller, less productive and more reliant on lower-skilled, lower-cost labour than other firms. A KPMG report (May 2019) estimates 1 in 7 firms (between 8% and 14%) are surviving only because interest rates are low with the highest concentrations in energy (23%), automotive (17%) and utilities (15%), all of which are important sectors in our region. Economic shocks lead to redundancies and many of these affect low-income households which can also be close to the tipping point in terms of household debt.
Business sectors reliant on communal service delivery and social gatherings
Except for food and basic needs, consumption is set to drop, globally, nationally and regionally. Entertainment, restaurants and pubs and any services dependent on communal delivery are being severely affected. Air travel has already been impacted and will go through a paradigm shift over the next few months as an industry. Tourism is worth £12.6 billion in the West Midlands region and an estimated 135,725 jobs (about 5% of the current working population). Around 5.5 million UK tourists spend £860 million per year staying in the region. We are already seeing huge drops in revenues and the government is trying to inject liquidity and support into these sectors. This will become a great deal worse through Easter and into the summer period.
Education and student spending
Education is the region’s 4th-largest industry. Not only is it a big direct and indirect employer (the University of Birmingham is responsible for over 16,000 jobs and contributes £3.7 billion each year to the economy) but the UK and foreign students (and their parents) spend a significant amount in the region each year. Chinese students and their spending are a particularly important input into our economy. About a third of non-UK students in the UK are Chinese and across our 12 regional universities we host about 12,800 Chinese students (Birmingham is responsible for about 4,220, Warwick and Coventry about a thousand fewer each).
Economic and Social Risk Mitigation?
Many of the action points developed for a hard Brexit scenario are relevant as interventions in the regional economy. Similarly, the experience of the post-2008 credit crunch is that preparing for and riding on the economic bounce-back is critical for longer-term growth.
Liquidity is key, to keep firms operating and/or solvent in the face of increased costs, reduced demand and regulatory interventions on health grounds (e.g. forced closures). Large scale redundancies will not only transfer the problems to households and public services but will damage communities over the longer-term and reduce the region’s ability to grow quickly in the up-turn. Reduced incomes for households also cycles straight back into reduced consumption, stalling the economy for longer.
Targeted support for the firms most likely to go bankrupt is a clear and obvious necessity. Initial modelling at WM REDI by Andre Carrascal Incera shows the potential impact of a 3-month partial shut-down of key sectors in the region, with an emphasis on accommodation and food services (hotels, bars, restaurants etc.), arts, entertainment and recreation. Just over 61,000 jobs would be at risk, from full redundancies to reduced employee income. This equates to a 3.5% drop in annual output and slightly more in GVA terms. If falls in other sectors from teleworking measures are included in the scenario, then the negative effect on output increase to -4.4% (4.8% of the GVA and 5.3% of the employment). (Note that this is an annual result which does not take account of any potential rebounding effect in the next quarter).
There will be some compensating increases in healthcare services, although the availability of appropriate skills is a big unknown. A 25% increase in the demand for health services would require around 10,000 extra employees in the sector, assuming the productivity of the workers in that sector remains the same. 8.6% of the GVA of our regional economy is in life sciences and healthcare (2016 data).
Targeted support is critical, however, we currently do not know (1) the timescale of the Covid-19 disruptions, or (2) the degree to which current policies, including financial injections, are reaching particular sectors or firms, large and small. The £7bn national Budget package to help businesses deal with the crisis included business rates relief and a new hardship fund have just been launched. A key issue is whether and when firms can and will get access to the benefits – and what impact these have on redundancies.
This blog was written by Professor Simon Collinson, Director, City-REDI and WM REDI.
The opinions presented here belong to the author rather than the University of Birmingham.
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