By Dr Jonathan Gillham, Chief Economist, and Hoa Duong, Economist
Examining risk is very important because risks are part and parcel of a changing world – and with change comes uncertainty. In turn, economic uncertainty is causing us all to reassess our priorities and the risks we face. For many businesses, it's created a need to ‘translate’ risk, to rethink strategic goals and business models, so they can seize on emerging opportunities.
Creative thinking is required to unlock these new opportunities. This starts with stepping back and looking at what is going on in the world around us.
The futures framework created by Strategy&, PwC's strategy consulting business, provides a fascinating look at how our world will be disrupted by long-term global trends. And we can already see signs of how these trends are beginning to shape the UK economy, which means we can begin to connect this vague understanding of uncertainty with likely short-term outcomes.
This means being willing to analyse economic data and trends against some of the new expectations about uses of technology, localism, quality of life and wellbeing. This is not as daunting as it sounds.
To give a view on how our economy might evolve, we’ve used data to inform four lenses. Though each lens is distinct, there are some common themes that give us a clearer understanding of the bigger challenges facing society:
These lenses are underpinned by new measures of success that move beyond GDP and bottom-line growth as our core benchmarks. The COVID-19 pandemic has had such a profound impact on people’s lives that factors such as wellbeing, quality of life and environmental impact are all rising rapidly in importance. Falling short in these areas could be as fatal to a business’s prospects in the future as failure to perform against narrow financial measures has been in the past.
These factors come out clearly in each of our economic lenses.
Automation will transform the labour market. This will have a disproportionate impact on some lower skilled jobs, just at a time when post-Brexit pressures create labour shortages in some sectors.
As employment support schemes unwind in the UK as we move out of the pandemic, the risk that automation poses to certain sections of the workforce could quickly become apparent. For example, taking into consideration skills and furlough uptake, our model suggests that occupations with 1% higher proportions of high-skilled workers would result in nearly 0.5% lower risk of job loss due to automation.
Low-skilled sectors (i.e. smaller bubbles) have higher furlough uptake and are at higher risk of automation
Source: ONS, PwC analysis
Ultimately, this could lead to a smaller but more automated workforce as businesses invest in the digitisation needed to transform, reduce headcount and address the risk of being left behind.
One of the biggest challenges inherent in this transformation is the current and future digital skills gap, highlighted by 72% of large companies and 49% of small and medium-sized enterprises (SMEs) as a major concern, according to the Department for Culture, Media and Sport. The prize is enhanced productivity from unlocking the potential of smart labour. The risk is a lack of appropriate skills to grow your organisation.
Unlocking productivity requires investment, giving large firms an advantage, but potentially leaving SMEs struggling to keep up. If society is to achieve sustainable, long term economic growth (not to mention ‘secure’ growth given increasing cyber threats), then we need to find a collaborative approach that ensures the benefits of automation and increased productivity are shared.
One of the biggest challenges inherent in this transformation is the current and future digital skills gap, highlighted by 72% of large companies and 49% of small and medium-sized enterprises (SMEs) as a major concern
This creates opportunities for local businesses. A more home-based workforce will shop and travel locally, a trend that is simultaneously a threat to city centre businesses dependent on high levels of commuting.
It is not just the desire to work from home that drives such conscious consumerism. There is an increased demand for sustainable consumption and investment, and a new focus on health and wellbeing.
The Government’s levelling-up agenda will have to address these factors alongside the traditional measures of poverty and economic success. Firms must embrace greater transparency as consumers need to be clear their spending and investment is contributing to sustainability, and not detracting from it.
Alongside financial factors, investors pay more attention to companies’ ESG strategy
Globalisation has been one of the dominant economic trends of the 21st century. Many now question whether it has gone too far, creating risks that are beyond the control of governments and businesses.
The disruption caused to international trade by the pandemic and Brexit has exposed the vulnerability of extended supply chains in many sectors. This is accelerating the trend towards regional trading blocs and reshoring, as businesses reassess the trade-off between lower labour costs offshore and greater supply chain resilience. A shift to more locally-produced products will also be an opportunity to build greater trust with consumers.
Globally, labour costs were already on the rise before the pandemic, and this could now accelerate, leading to higher production costs for businesses that rely on offshoring or outsourcing. However, with the UK’s minimum wage likely to move into the top three in international rankings this year, labour costs will be a major consideration for any organisations considering reshoring their workforce.
The UK’s labour costs are considerably higher than in other economies
Protectionism and geopolitical instability also drive up costs and hit consumer choice. Many of the factors driving trade deglobalisation are outside the control of individual firms but still play a central part in the rethinking of business risks and opportunities.
Digital tools will be crucial to manage these supply chain risks, particularly integrated systems which should enable a semblance of just-in-time stock management, lost in the pandemic and post-Brexit shakeouts, to return.
As with all digital systems, cyber resilience will be vital as a supply chain is only as strong as its weakest link.
Casting a long shadow over all these lenses is the emergence of an expanded state role in the developed world. In the UK this is almost counter-intuitive, as Conservative governments have for generations been champions of low government spending and low taxation. Those old norms can no longer apply.
Government spending soared as emergency support measures for individuals and businesses were put in place. As those measures are slowly withdrawn, other spending priorities will likely keep government debt and spending at near record levels. There is no longer a fear of large deficits – certainly while interest rates remain at record lows – and no appetite for austerity as there was after the 2009 global financial crisis. The Office for Budget Responsibility projects that public sector net debt will peak at 108.6% of GDP in 2023/24, its highest level since 1958/59.
We must take shared responsibility to fund the spending needed to support the UK’s recovery. This will result in upward pressure on corporate and personal taxes, an example being the recent rise in national insurance contributions.
The Office for Budget Responsibility projects that public sector net debt will peak at 108.6% of GDP in 2023/24, its highest level since 1958/59.
When viewed together, these four lenses show there are a handful of critical challenges facing society. These can be summarised as:
It's difficult to see how any individual organisation or government can create an effective response to these systemic risks. We believe that to overcome these challenges and emerge stronger, we need to work together to find collaborative solutions.
For example, if we are to answer the talent shortage, then businesses need to work closely with higher education institutions to be clear on the types of skills that need to be developed. The government will also need to be involved, providing the funding for those courses so we can equip workers with the skills needed to boost wider economic prosperity.
We also need to find new ways of measuring value in more nuanced and transparent ways. Our analysis shows that while profit is important, so are health, wellbeing, and environmental issues. Firms will have to demonstrate they are good places to work, to invest and to do business.
This requires a renewed focus on building trust. Individuals, organisations and governments need to be accountable for their actions, so we can build the connections across society that will enable us to adapt and uncover shared opportunities for growth.
In a follow-up article, our colleague Hayley-Beth Peters explores the practical steps that businesses can take to get a forward-looking view of risk.