24 Jun 2020
The challenge of an S-shaped recovery
Market commentators spend a lot of time contemplating whether the future path of UK GDP will be V-shaped, U-shaped, or indeed if any upturn will happen at all. These perspectives miss something important – the only recovery that makes sense now is one that has S for Sustainability at its core.
But what does a sustainable recovery mean? We need sustainable investment and consumption. The question is how we can do this in a post-coronavirus world that seems sure to see record unemployment levels. The scars of a potentially deep downturn will not be easy to manage.
So how might we do it? A good starting point is to develop the best of what we have today, even though it may not be reflected properly in GDP measures. I suggest a focus on both social and natural capital as two critical foundations for any future economic recovery.
Andy Haldane, chief economist at the Bank of England, has correctly highlighted that social capital has clearly bucked the COVID-19 trend. I would define this as the nexus of intangible relationships between individuals and communities that underpin society. At heart this means charity, both formal and informal. A real priority going forward must be for the government to maximise support for the charitable and voluntary sectors to the greatest possible degree, as we have seen the power of both in recent months.
In the end, a sustainable growth course may be the only way forward for the UK, but it is certainly not going to be an easy one to navigate.
Natural capital is an equally important foundation of sustainability, and to some extent it also opposed the COVID-19 trend. Anecdotal evidence is already emerging of improving ecosystems during the crisis, and lower levels of pollution more generally. In a previous post, I emphasized that working with nature can bring ‘natural growth’, as we create virtuous circles with the environment, rather than the vicious ones we are trapped in today.
Beyond creating the solid foundations of social and natural capital, the most important way to safeguard the future of our economy requires change in terms of our consumption patterns, and significant investment in our core infrastructure.
Yet here I see some gremlins. The consumption hurdles are perhaps obvious – less carbon-intensive travel, healthier diets etc., will inevitably meet resistance. Equally, there are important hurdles to sustainable infrastructure investment in terms of financing.
Think of the UK infrastructure sector today. Much of it works on the principle that investment returns are safeguarded by higher customer bills in future, through various regulatory formulae. What happens as unemployment peaks post-furloughing, and customer bad debts soar, yet we wish to increase investment? There is a risk of greater wealth inequality, as those least able to bear the pain are faced with ever-rising bills.
In the end, a sustainable growth course may be the only way forward for the UK, but it is certainly not going to be an easy one to navigate. In future posts, I will have a look at ways we might steer the ship successfully in the area of our core infrastructure, starting with the ongoing energy transition and development of a circular economy.
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The blog does not aim to give investment advice, but is designed to afford relevant longer-term context to investors, encouraging a broad perspective where uncertainty is high and a spirit of learning is important. The views expressed are those of the author, not those of Investec.