Hidden Jobs Shock Brewing

A hidden jobs shock is brewing. The sudden death of the centralised office is shifting Irish service jobs to the EU periphery, to countries like Romania and Greece as multi-nationals interpret work-from-home as an unexpected bonanza. The pivot is set to catch the Irish Government cold as high value management and workers, not on assembly lines, are offered new locations elsewhere in the EU, failing which redundancy terms are tabled. Remote locating within the EU is perfectly legal, within the Treaty of Rome and part of Single Market competition. Enquiries this week reveal the pattern is already taking root across a wide number of major Multi-National brands. The aggregate data on job losses and the loss of the multiplier effect in local economies may yet impact Ireland’s carefully managed relationship with FDI. Don’t be surprised to see this filter out into the main news cycle shortly. So, what other surprises lie in store next year?

Let’s start with what could go wrong.

• The excessive amount of quantitative easing and money printing has created sluggish conditions, like a giant sponge taking on too much water.  The latest round is bringing Japan-type conditions to parts of the developed world with similarly unfavourable demographics, this means very slow growth in Europe.
• Expect a slew of company failures. Before Covid hit, half the corporate bond market had credit quality at BBB or less. Globally the $5 trillion Leveraged Loan sector, (lending to highly leveraged companies), is the weakest spot of the debt bubble. You’ll see the earliest signs of stress from companies failing but it will also manifest itself in tightened credit from banks nervous to shore up scarce capital.
• In the developed world national debt is rising to levels unseen since World War Two, many countries will end up with debt to GDP ranging 100% to 125%.  If growth remains sluggish the only way of sustaining the debt load, without years of prolonged zero interest rates, is by raising taxes, in turn leading to social and political change as the extremes move to the centre.
• A sustained pandemic that produces a revolving door of lockdowns would exhaust forbearance programmes but, the worst outcome would be a pendulum shift in consumer sentiment towards hording cash.  This would shake the foundations of the banking system, exposing Central Bank’s as fully out of ammo and metastasise State involvement in economies
• British trade strategy remains a substantial risk, although the price behaviour of Sterling indicates the view that Prime Minister Johnson is bluffing about cutting the UK off from its major customer.  It is not a one-way street because Europe is heavily reliant on London’s Financial Services capacity to run key parts of the European economy, so a ‘skinny’ trade deal still looks the most likely outcome once the theatrics stop. The real risk is that Boris miscalculates, there is no EU trade deal, not even a skinny one and no fast US trade deal as Biden takes the White House and the Democrats, the Senate. In play is regulatory alignment to level the playing pitch across employment, environment, social standards, state aid and competition rules but throw in fishing quotas and a protocol for customs checks in the North and the excuses Prime Minister Johnson can cook up to crash the deal are endless. Let’s hope he blinks first and the worst outcome is a tiresome TV speech drawing on Tennyson’s poem that repositions Johnson’s blunder as triumph.

So, what could go right?

• There are increasing signs of progress towards a vaccine. By end Q3 last there were 143 pre-clinical trials in operation, 23 in Phase One testing on small groups of people, 14 in Phase Two on hundreds of people and seven in Phase Three testing on thousands of people.  Over the fifteen years to 2015, the success rate for Phase Three vaccines moving to approval was over 85%.
• Markets have been pricing a US recovery to 2019 economic levels by the end of 2021, with China expected to be 4% or so ahead of where it stood at the end of last year.  Europe is likely to lag, -5% below end 2019 economic activity, so slower to fully recover. Britain, depending on the shape of its EU Trade deal, will be similar to Europe but in a no deal, it could shed 10% of its economy over the two years to the end of 2021.
• The excess capacity in the global economy, the output gap, doesn’t put a dampener on inflation because the build-up of cash by consumers, after a decade of deleveraging, starts flowing.  In the USA alone it has added c.$2.5 trillion to household deposits mostly from Government transfers of cash, a phenomenon replicated throughout the developed world.  The broad measure of money supply growth in the USA, known as M3 which captures term deposits and money market funds has more than doubled to reach a level in excess of US GDP, at $23 trillion.  We’ve never seen so much cash throughout the world.  This is the Wall of Money effect and nobody really knows how it plays out in the surge of spending, inflation and rapid recovery.
• An uncontested blue slam dunk next week that puts Biden in the White House and sees the Democrats take the Senate (they dominate Congress), this would free up a $7 trillion spending programme across Infrastructure, Education, Health and Social sectors that would act as an immediate propellant to the world’s biggest economy, benefiting Ireland.

What are the wild cards?

• Last year the World Health Organisation identified vaccine hesitancy and anti-vaccination in the top ten global health threats, it is expecting too much to assume that this phenomenon will not pose a threat to recovery.
• The virus, already displaying the characteristics of a common flu, loses its potency and becomes just another corona virus that doesn’t swamp existing medical infrastructure.  The alternative is grim and, no one wants to say it, but Covid-19 mutates and confounds vaccination.
• Fragile supply chains fail in countries like Yemen, Syria, Sudan, Ethiopia, Somalia and the Democratic Republic of Congo and leads to regional famines at levels unseen since World War II, this is a real risk according to the UN World Food Program.
• Sovereign defaults rise, causing IMF bailouts for countries most vulnerable to servicing their debts especially those with high amounts of Dollar denominated debt and weakened from struggling oil, gas and resources revenues from a world in surplus.

Whatever happens next, we have filed away the v-shaped recovery lark that dominated the early stage sentiment as popular fiction and are settled in for a grinding war against this enemy. It was never going to be any other way.

Eddie Hobbs

eddie@eddiehobbs.com