Alan Bridle

Columnist

Alan Bridle

UK Economist, Bank of Ireland UK

A Different Type of “Shock” to Contend With

As pandemic concerns recede, local businesses might reflect on two years of economic turbulence and a V-shaped pattern of activity that resembled neither a “normal recession” nor a “normal recovery”. Thankfully, many initial fears of rising unemployment, falling asset values and soaring rates of insolvency proved to be misplaced as unprecedented quantities of public money substituted for private spending.

Covid-19 hit some sectors and incomes harder than others – the so-called “lockdown divide” – while the rebound has been unbalanced and uneven, disproportionately reliant on government spending and consumption with business investment and exports continuing to lag. In output terms, the economy has broadly returned to its pre-pandemic level but at the cost of a couple of years of “lost” growth. The war in Ukraine may represent the third “once-in-alifetime” shock in 15 years for business to negotiate, but unlike Covid-19, this is a shock with repercussions that will hit all incomes, demanding a different response.

Revisiting the 1970s?

There are parallels and, significantly, key differences.

Nearly three decades of post-war stability and rising prosperity came to an abrupt end with the huge shock of the Arab world’s oil embargo of the West in the wake of the Yom Kippur War of 1973 and the Iranian revolution, precipitating an eightfold increase in the oil price and triggering hyper-inflation, recessions and industrial unrest. Policy errors compounded the misery.

Today, the shock of Covid-19 has triggered supply shortages and rising inflation while, just like the 1970s, growth in the money supply and government borrowing have soared and firms face shortages of materials, components and labour, bidding up wages.

However, unlike the 1970s we have now had the benefit of decades of globalisation, more flexible, competitive and deregulated markets, floating exchange rates and independent central banks. Furthermore, in contrast to then, the labour market has weathered recent shocks of the global financial crisis and the pandemic much better.

Re-thinking the macro consequences

The consequences of the West’s disengagement from Russia are unfolding with the security of energy, food supplies and defence all subject to a rapid reassessment. Investment in alternative sources, storage facilities and energy conservation technologies are all on the agenda. Northern Ireland may be less vulnerable than EU states to further disruption to gas and oil supplies from Russia but is not insulated from shocks across the wider market.

Looking ahead, higher oil prices are likely to be here to stay for some time. Towards the end of March, futures markets were pricing a barrel of oil for delivery in January 2023 at just under $100, below the recent peak – suggesting some easing of pressures – but well above the $78 a barrel seen at the start of 2022. However, in a more extreme scenario, further escalations or disruptions to supplies without building up reserves in storage could leave Europe entering next winter in a precarious position, possibly necessitating industrial shutdowns and domestic rationing.

Europe now faces two energy transitions – towards net zero and, now, reducing reliance on Russian supplies. Short-term trade-offs seem inevitable and greater use of carbon-intensive coal and oil is probably unavoidable. Longer term, some mix of energy efficiency, renewables and nuclear may be needed to meet both challenges.

Following the pandemic, it was already clear that a new era of “big government” had commenced. With an energy crisis, there is an urgency for further fiscal interventions to underwrite some of the escalating costs to business to help preserve jobs, exports and confidence while simultaneously accelerating initiatives to develop alternative sources and boosting efficiency.

How can firms respond at the micro level?

A few suggestions: • Maintain strong liquidity buffers and, where possible, conserve cash.

Effective communication with your banker is vital – no nasty surprises! • Stay even closer to your customers and suppliers and be alert to possible contagion risks, including cyberattacks. • Given the sanctions regime, know the origin of your product materials. • Engage fully with industry and sector groups and business organisations for reliable information and insights on available support. • Strategy: recognise that recent events might dictate adjustments to your

“flightpath”. • In times of heightened uncertainty make your leadership even more visible. • Focus on the parts of your operation where the real value lies and look after your key staff. • Stress-test your business against various scenarios – asking “what happens if?” • If you are energy-intensive, begin thinking now about winter 2022-23 and beyond. • Finally, don’t forget about the potential opportunities that arise from periods of disruption, dislocation and crisis.

Recent disruptions may be the latest tailwinds for greater decentralisation, localisation and supply chain reorientation.