Scarring: Mapping the damage of the lockdowns

Governments are looking at the longer-term impact of lockdowns on their economies. Expect to hear more around the world about ‘scarring’ over the next few weeks.

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  1. Charles Stanley

Chastened governments are examining the damage that lockdowns have brought. They are cautious about the speed at which they can relax to get more people back to work. They are only too conscious that too relaxed an approach could induce a second wave of the virus.

Asking people to down tools again and stay at home for an even longer period next time to be safe would not be an easy thing to do. It would do even more damage to economies and to confidence, that precious feeling that powers both investment and consumption.

Governments are also concerned in the northern hemisphere that the return to autumn and winter may bring better conditions for the virus, which some think is weakened or destroyed by too much sunlight if not by heat. This gives government a short window to get some normal working and earning in before they need worry more again about the spread of the virus.

This winter it may be test and track systems which force local or regional shutdowns if the virus flares up. Treasuries do not fancy having to carry a third or more of their national workforces on benefits or subsidy schemes through the winter to keep them available for work in their old companies. The numbers involved become too huge.

Explosive cost of government support

They are also alarmed that if the shutdowns and impediments of social distancing go on for too long there could be lasting damage to the capacity of their economies anyway. Short time working and furlough schemes, cheap loans schemes for businesses and grants for self-employed can see people through at a just about affordable cost for the state for a few weeks or even three months but they cannot become a semi-permanent feature of life. Governments will need to taper or remove the generous schemes.

At a certain point if controls are too stringent for too long small businesses go under, entrepreneurs pack up and large companies have to butcher their payrolls and slim their operations to a more affordable level. A business may keep someone on a short time or furlough scheme for a quarter, but can they say there is still a job there if they have to get through a whole winter with no serious prospect of full-time work for them?

The ability of the economy to supply a wide range of goods and services is impaired. Economic flexibility is lost. Both supply and demand contract together. It is this loss of flexibility and capacity that people are now calling scarring. Companies making everything from planes to shop fronts, and from business clothes to cars may conclude there is not going to be the demand for their products anytime soon to be worth persevering with a full team of people capable of the production levels of 2019. The more people that are out of work or on much reduced earnings, the less demand there is for goods and services that are nice to have but not essential.

Tourism woes

In the northern countries of Europe and the northern states of the US and Canada there are particular concerns about hospitality, tourism and leisure businesses. The worry here is the three winters scenario. These highly seasonal businesses in seaside resorts, beauty spots and towns basing their offers on summer events and visitor attractions need high volumes during a few warm months. Local labour often does two or more jobs from April to October and people work long hours, knowing the winter will see lay-offs and low hours. Some hotels and B&Bs close down for some of the winter weeks, whilst others try to make a feature of Christmas and the New Year whilst reducing service and employment for the mainly dull months of November to March. Many visitor attractions close. If this summer the bulk of this leisure economy stays closed owing to lock down, or only manages to open for much reduced numbers thanks to social distancing and fears of travel, these seasonal businesses suffer badly. They have to go three seasons in a row with no good period to recharge the bank accounts or give more employment to locals.

There are also worries about transport and travel businesses. In the UK government advice is a train or bus operator should be thinking of taking just one tenth of the number of passengers for any given capacity that they did prior to the virus. Train companies have effectively been nationalised as they cannot make profits under such conditions, whilst buses will doubtless also want higher government subsidy to operate.

The Spanish Foreign Minister this week advertised that the tourist centres of Spain are back in business and want a summer season. She had few answers over how air travel would work with social distancing and how holidaymakers would manage with quarantine requirements for some countries and airports. How can an airline be profitable if they have to keep numerous seats empty for safety, or if many people decide they are not so keen on being shut up in a flying tube with other passengers for a few hours anyway?

Government dilemma

Governments are boxed in. They can only have an affordable economic policy if they encourage more people back to school and work. If they do so too quickly, they may trigger the worse result of a further spread of the disease and the need to clamp down all over again. Share markets are still more relaxed about the impact of all this on the vulnerable sectors needing social contacts with customers than the news flow suggests is reasonable. This is the result of very generous liquidity and lending from the authorities.

No amount of cash to markets can, however, save shareholders in businesses with too little turnover who will end up in capital reconstruction or bankruptcy. Forced reconstructions like Norwegian Air are penal on existing shareholders, and a stream of rights issues and placings from stronger companies will dilute earnings and dividends.

Meanwhile, the world adapts to remote working, to digital medicine and online entertainment, to Zoom parties and Microsoft Teams lectures and learning. The internet-based economy is enjoying an extraordinary boost, as the direction of change apparent before the crisis becomes a rush to the new. Amazon recruits more delivery drivers and takes on more warehouse space as High Street shops stay closed or make reduced customer numbers queue on pavements before entry. Scarring only applies to traditional business models.

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