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Optimistic founders and the harsh reality of economics

Who'd be an economist? Any economists reading may want to reply to that question directly, or may just decide to look away. This is not a post kicking economics. There's been enough of that since Thomas Carlyle first dubbed it "the dismal science". With uncertainty about almost everything at levels that merit that overused adjective "unprecedented", it's a tough time to be making predictions or forecasts of any kind.

Business founders know this as well as anyone. They need certainty to be able to plan for the short, medium and (don't laugh) the long term. This is one of the most worrying aspects about a quick poll we conducted recently with Supper Club members. Asked how confident they were feeling for 2022, 66% answered they were either concerned there will be uncertainty and some dips (61%) or that they were not confident about recovery in the year ahead (5%). That concern over uncertainty may well hinder business investment more widely. On the potential "glass half full" side of things, a third of respondents reported feeling "very confident of recovery and a strong year ahead".

Uncertainty is now the norm

We have all adapted, adjusted and come to accept new normals over the last two years, and there is now an acceptance that a high level of uncertainty is something we'll just have to live with. From long-term, systemic issues such as the climate crisis and the rapid acceleration of technological change, to more immediate political and economic applecart tippers, such as Covid or Brexit, there are more known unknowns than ever. And despite a rush of recent black swan events, we have less time than ever available to scan the horizon and look for any early warning signs of the next unknown unknown.

This week, Supper Club members also heard from Investec's Chief Economist, Philip Shaw. Despite this rising tide of uncertainty, he did a brave job of outlining some of the major trends he sees for the UK economy this year. As is often the way with economists, Shaw offered up a mix of good news and bad news.

Even good news comes tinged with sadness

The good news is that, based on South African data and early indications from the UK, the peak of the latest wave of Covid appears to be over. Things are edging towards slowing down. There is even some tentative talk of learning to live with Covid. While case rates remain astronomically high, hospital admissions and deaths are much, much lower. That Omicron appears to be closer to a bad flu is good news also for Boris Johnson, who has so little political capital left that he'd be unlikely to get another round of restrictions through parliament. And even if he did, he now lacks both the moral authority to limit how others behave, and the ability to identify a party taking place in his own garden. Things will have to take a very severe downturn for there to be another lockdown. This is good news for most businesses.

The bit where the economist talks numbers

Less good is the fact that inflation looks to be heading to a peak somewhere between 6% and 7%, well above the target rate of 2%. It will inevitably fall, as one-off shocks (like oil and gas prices) work through the system. But even though it's likely to come back down, such levels of inflation make it inevitable that interest rates will rise through the year. Here the good news is that Shaw predicts the rise will be both slow and limited, ending 2022 at 0.75% and then edging further up in 2023 to 1.25%.

The reason the rates won't need to increase more sharply, Shaw explained, is that there are other factors at play, such as the planned tightening of fiscal policy (higher taxes, in other words) and the gradual withdrawal of the Bank of England's programme of quantitative easing.

But in the short term, inflation will put pressure on businesses in a number of ways. Inevitably, rising costs for raw materials will eat into the profits of those businesses in very price sensitive markets (where it is harder to pass all or some of these added costs on). The counter to this is that wide reports of high inflation allows those in non-price sensitive markets the cover to increase prices without annoying clients (as it's expected) and this potentially could allow them the chance to improve margins.

But price rises also lead to demands for wage rises. And this at a time when there are already structural skills shortages across various parts of the economy, itself causing upward pressure on wages and salaries. While this may be difficult for individual businesses to deal with, the good news at a macro level, according to Shaw is that this wage inflation will have a very limited impact on the rate of inflation. Although, this is as much as anything because of the much larger impacts of the short-term shocks such as the soaring price of second-hand cars and the wild fluctuations in oil and gas prices.