Contagion: The Economic and Social Impacts of Covid-19 on our Region

In the case of almost all kinds of economic, social, political or health-related systemic shocks, the vulnerable are the most severely impacted.

We know a great deal now about the susceptibility of particular groups in our population to the Covid-19 virus. But the economic shocks will be significant and will disproportionally affect low-skilled workers and low-income households, regardless of whether or not they contract the virus. A recent headline stated that there will be more bankruptcies than deaths from the Covid-19 epidemic. This is not to diminish the importance of the personal losses being experienced, but to point to the additional risks faced by those who have the least in our society.

The two, major economic contagion or transmission effects come from the fall in net revenues for firms and from unemployment. The first results from increased (supply-side) costs and declining consumption. The second from the response of firms to these economic conditions, reducing costs by laying off workers. In combination, these will stall the dynamism of an economy. But unemployment then transmits these economic effects from vulnerable (in debt) firms to vulnerable (in debt) households. This form of contagion has further knock-on effects on the benefits system, healthcare, housing, crime, mental health and the well-being of communities. For these reasons, it is important to understand which firms are likely to impacted by the evolving Covid-19 crisis and to channel government support as precisely as possible to the right places.

Our region is particularly at risk, given the structure of our economy and an already low level of average household income. Over 107,000 households are workless, with dependent children. The Index of Multiple Deprivation shows that 56.4% of Birmingham’s population live in the most deprived 20% of areas in England. Not unrelated to our regional exposure to Covid-19, life expectancy in the most deprived areas in Birmingham is 10 years lower for men and 8 years lower for women than in the least deprived areas.

The key industry sectors impacted in the West Midlands mirror the pattern nationally, but we are particularly exposed for four key reasons:

1. Our large manufacturing sector and associated local supply chains. The automotive industry, worth over £11 billion to our regional economy, is already in difficulty and is facing production shut-downs as costs increase, demand falls and workers stay home.
2. Vulnerable ‘zombie’ companies, which survive by paying off interest on loans, but not the loans themselves (around 10% of UK firms), are vulnerable to bankruptcy. They tend to be smaller, less productive and more reliant on lower-skilled, lower-cost labour than other firms. The West Midlands has a larger number of these firms than most regions and redundancies will particularly affect low-income households.
3. Business sectors reliant on communal service delivery and social gatherings such as entertainment, culture and the arts, restaurants and pubs, are facing a partial or complete shut-down. Tourism is worth £12.6 billion to our region and an estimated 135,725 jobs, or about 5% of the working population. We are already seeing huge drops in revenues and the government is trying to inject liquidity and support into these sectors. This will get a great deal worse through Easter and into the summer period, again affecting lower-skilled, lower-income workers.
4. Education is the region’s 4^th-largest industry. Not only is it a big employer (the University of Birmingham is responsible for over 16,000 jobs and contributes £3.7 billion each year to the economy) but UK and foreign students (and their parents) spend a significant amount in the region each year.

Economic and Social Risk Mitigation?

Liquidity is key, to keep firms operating and/or solvent in the face of increased costs, reduced demand and regulatory interventions, including forced closures on health grounds. Large scale redundancies will not only transfer the problems to households and to strained public services, but will damage communities over the longer-term and reduce the region’s ability to grow quickly in the up-turn.

Targeted support for the firms most likely to go bankrupt is a clear and obvious necessity. Initial modelling at WMREDI by Andre Carrascal Incera shows the potential impact of a 3-month partial shut-down of key sectors in the region, with an emphasis on accommodation and food services (hotels, bars, restaurants etc.), arts, entertainment and recreation. Just over 61,000 jobs would be at risk, from full redundancies to reduced employee income. There will be some compensating increases in healthcare services, although availability of appropriate skills is a big unknown. A 25% increase in the demand for Health services would require around 10,000 extra employees in the sector.

Targeted support is critical however, and we currently do not know (1) the timescale of the Covid-19 disruptions, or (2) the degree to which current policies, including financial injections, are reaching particular sectors or firms, large and small. The £7bn national Budget package to help businesses deal with the crisis included business rates relief and a new hardship fund have just been launched. A key issue is whether and when firms can and will get access to the benefits and what impact these have on redundancies.

Here is the link to Simon Collinson’s longer blog on the same subject.