Webinar: The Global Economy after COVID-19

Dr Robin Niblett CMG

Ladies and gentlemen, this is Robin Niblett, the Director of Chatham House. As you may know, we’ve got a big event this evening. I see a few more people joining, but over 300 participants on this call. So, I’m simply going to say, “Welcome,” to all of you. We’re now going live and it’s an absolute pleasure to welcome Philip Hammond with us today. Philip will be speaking with us in a minute. Obviously known to everyone here, having served as Chancellor of the Exchequer from 2016 to 2019 for three years, through a turbulent time, both on the global economy, but also for the UK itself, as well. But somebody who’s also held two of the other important and great Offices of State, as Secretary of Defence and Foreign Secretary, as well as Secretary of Transport. So, we could take him in any sort of direction on how the UK is coping with this crisis. But as the title indicated, this is about The Global Economy After COVID-19 as an opening standpoint. So, in a minute, I will turn to Philip Hammond and we’ll get a few remarks from him.

I am going to turn to a couple of guests, who I thought would be good to get a sort of brief response from and just engage a bit in the conversation. Sir Jon Symonds, Jon Symonds who is now the Chairman of GSK, formerly Deputy Chairman of HSBC. But also, somebody who both through his GSK line and also through his work on the Genome Project is somebody who knows the health situation particularly well. Wrote an interesting private paper, which hit [inaudible– 01:34] recently on how to come out of the lockdown, thrilled he’s with us. And also, Dame DeAnne Julius, who used to be Chairman of Chatham House. She was a Founding Member of the Monetary Policy Committee and also is now a Distinguished Fellow at Chatham House, has been on various Boards and Chief Economist of various companies. But I thought getting a couple of their viewpoints in before we engage in all the Q&A would be great. And the last point I’ll make, after we’ve had those conversations, there is a ‘Hands Up’ function. Little difficult to use with 300 of – 340 of you on this call. But that may give us an option for a slightly more interactive format later on, rather than just going through the Q&A. So, last point, this is obviously on the record, not under the Chatham House Rule. It is being livestreamed. You can tweet away #CHEvents.

But let me turn right now to Philip Hammond. Philip, thank you very much for joining us. I’m sure you’ve been doing quite a few of these Zoom meetings, in recent weeks. But we’re really thrilled you would join us at this pivotal moment where the UK and other key economies are making that move or trying to work out how they make that move, from lockdown to recovery. And I think this note of ‘After COVID-19’ in our title is probably some of the issues we want to get to. But obviously, bringing great experience on the international stage as Chancellor, having participated in G20, IMF, all of these meetings, we really look forward to your remarks and thank you for joining us. Over to you.

The Rt Hon Philip Hammond

Well, Robin, thank you very much and it’s a great pleasure to be here and thank you for inviting me to make some opening remarks. I think the most important thing is to start by acknowledging that this is primarily a health crisis and it’s right that it’s been treated as primarily a health crisis. But it is also very important that we are not intimidated into silence on the economic implications and consequences of this health crisis. Public opinion on this issue has been very clear, at least in the UK, that it supports the primary health focus that the government has applied. But as Lord Lamont commented I think this morning, it almost feels as though the public has been anaesthetised to the economic consequences by the very significant interventions that government here and indeed around the world have made. And the public does need to know that those interventions can only be short-term and therefore, however they may feel today, there will come a point, and it probably won’t be too far away, where they start to be concerned, as well, about the economic implications. So, it is right that we’re having this debate and of course, we have it in the context of a global economy that was already facing some pretty significant headwinds before this crisis started.

The title, Global Economy Post-COVID is in itself slightly provocative. In a way, this will be a high-class problem for us to be dealing with, how to restart the global economy after we are sure that the COVID virus is conquered, that we have a vaccine, that we have treatments available. It will not be without its challenges, but it will be much easier than the alternative planning scenario, which is the one that I think we have to focus on, because we should always focus on the worst realistic case outcome. And that is that we have to restart the economy in an environment where we don’t yet know whether we will find a vaccine that’s effective, we don’t yet know whether we will find treatments or indeed, cures for the disease. That means that one at least potential scenario is a new normal, a new reality where business has to operate, the economy has to be reactivated, because we can’t leave it shutdown forever, but in a world where COVID has not been conquered. That will mean businesses developing new models. It will mean us being prepared to operate in probably a much more highly regulated environment. It will mean new ways of doing things, new ways of living our lives.

Even if we don’t – even if we are fortunate in being able to return to business as usual, we will have to deal with the scarring effects of this shutdown on the economy, the failure of some businesses, the loss of jobs, the erosion of fiscal capacity through the interventions that governments have made. Structural challenges, which will affect different sectors of the economy in different ways. The acceleration, perhaps, of some trends we’ve already seen, like the decline of the high street. It’s very difficult for me to imagine that all the retailers that have closed because of the virus will reopen after it, and perhaps some changes of priorities. It’s not clear yet, but I wouldn’t want to guarantee that the same focus will be placed on the climate change agenda, by all actors, after this crisis, as was before. So, some big structural changes, as well as the scarring effects that we have to deal with.

Meanwhile, I think we have to remind ourselves that for most of us, this virus is a big story as opposed to some of the relatively recent new viruses that have affected the world because it has particularly struck in the developed economies. And we shouldn’t forget that the kind of challenges that we’re seeing in Europe, in North America, from this virus may look relatively benign, as the virus sweeps across Sub-Saharan Africa, areas of the world where health facilities are significantly less developed and where in fact, in sub-Saharan Africa also large parts of the population are already immunocompromised and potentially more vulnerable to the consequences of the virus. This will be a huge challenge for the global system and if we get it wrong, is likely to have long-term impacts, like continued very strong migratory pressures.

Trade is another area that is going to be hugely challenged by the consequen – the immediate consequences of the virus. We’ve already seen, I think, exposed the lack of resilience in supply chains and many people, businesses, governments, international regulators will be thinking about the trade-off, the balance, between resilience and efficiency in supply chains and how we deal with that. As we resume global trade, we’re going to have to be very careful that we don’t see an orgy of protectionism and uncontrolled state aid, leading to an acceleration of the already strong trade tensions that we saw before the crisis.

And then, my final sort of international point is that there’s an uncomfortable underlying reality here around demographics. You can’t get away from the fact that the older part of the population, which is generally the part of the population that is well-cushioned by assets and wealth, has less of an interest, perhaps, in the early restarting of the economy and more of an interest in focusing on the health risks. The younger part of the population may well see the priorities in a different light, and in a world – certainly in developed economies, where there’s already a pretty strong sense that the balance has tipped unfairly across the demographic spectrum, this is one more straw. I won’t say it’s ‘the’ straw, but it’s one more straw on this potential – on this camel’s back.

We’re also going to have to have a debate in the longer run about who pays for all of this. Is it going to be higher taxes? Is it going to be another squeeze on public services? Is it going to be more borrowing, which means asking the next generation to pay the cost? Is it going to be another period when public authorities reach for, or at least tolerate, inflation as a way of dealing with the debts that have been run up?

I think these are all very big challenges for the global system and, if I might say, really, we have to try and avoid our Politicians across the world reducing this to apparently simplistic trade-offs. It isn’t about jobs versus lives, and anyone who dares to talk about the economic consequence is callous and heartless. It isn’t about liberty versus lives, but we will have to have a debate about how much of our freedoms and data privacy we’re prepared to surrender, in order to support technological solutions to managing the virus. And I think across the world there is a desperate need for leadership, for a strategic approach to this challenge, for people who can look beyond the immediate crisis, several moves ahead, and map out the route out of the crisis and a future for the world.

And if I can bring that back to the UK for a moment I, of course, understand the government’s focus on the immediate health priorities, and I very much support the measures the government has taken. I support the ‘turn on the taps’ response that the government has taken, in terms of fiscal and monetary response. And of course, the whole purpose – I hope many people will now be able to see this that perhaps didn’t see it before, but the whole purpose of the fiscal consolidation process after 2009, was to ensure that we had some headroom and some capacity to respond to the next crisis when it arrived, and whatever form it took. And no-one would have guessed that it was coming in 2020, or that it was going to take this form.

But I do think that the government now needs visibly to be looking two or three moves ahead, to be turning its attention to engagement with the business community about the recovery phase, even though it’s clear that restrictions will have to remain for now, and may have to remain for some time to come. That doesn’t exclude a restarting process for the economy. Business confidence is very fragile, and businesses need to see that there is light at the end of the tunnel, and that light is best presented to them, as the government engaging with them, setting some planning assumptions, mapping out some scenarios to allow businesses to plan, including for the scenario where business models have to change significantly, in order to accommodate a world where we’re living with restrictions and regulations, perhaps for a long time to come, it’s vital that business is ready for the green light, when the government decides to single it, and we don’t know whether there’s going to be a vaccine, or a cure. We don’t know whether we’re going to have to reopen with the virus still in place. But how we manage that gradual reopening, and how prepared business is for it, will determine how quickly we can respond. So, we need that route map. This is a £2 trillion economy. You can’t spin it up overnight from nothing and we owe it to businesses, we owe it to all our citizens, to make sure that when the green light is signalled, business can respond very quickly. And that means being prepared, because the quicker we do it, the fewer businesses will fail, and the fewer jobs will be lost.

And the final point I’d make for our own Politicians, our own government, is this, however much today the opinion polls are telling us, and our common sense is telling us, that people are primarily focused on the health situation, there will come a point in the evolution of this crisis where the focus switches. Once it’s clear that we are managing the health situation, people will start to then worry about their jobs, their living standards, their children’s futures and they will expect their governments to be ready to respond to that phase of the crisis as effectively as they responded to the acute health phase of the crisis.

So, I think, Robin, if I could just conclude these remarks by saying I’m afraid I am – I think that those who are forecasting a V-shaped recovery are probably erring on the side of optimism. I suspect that it is more likely that it will be something of a U-shaped recovery. But there is no doubt in my mind that how steep the recovery slope is, will depend on how well-prepared business is to respond when the government gives the signal, and how soon the government is able to give that signal.

Once that happens, across the world, there’ll be a huge challenge for the international community in co-ordinating the recovery phase, ensuring that it doesn’t give rise to new, explosive tensions around trade, state aid, unfair competition issues. And there is no doubt that this episode, this crisis, will have a huge influence on the global trade debate that was already going on. It will be a big shaper of the debate about the benefits of technology and the challenge of maintaining data privacy. It will potentially be a pendulum-swing moment in the ‘big versus small government’ debate. Government is clearly going to be playing a very large role in our economy through 2020. The question is whether it shrinks back to normal size quickly, thereafter.

I think, if I may, just three final points. Combined with the narrative we already have about automation, artificial intelligence, machine learning, etc., some of the challenges that this crisis has presented, I think may cause us to reorder our sense of the global hierarchy of labour. Which roles are the most important, the most well-remunerated, the most highly regarded, in our society? It could also determine the outcome of the US election, of course. And to the extent that it does, it could be a determining factor in how several of these important global debates play out over the coming years.

And finally, it may, and I say no more than that, it may turn out to be a determining factor in the future trajectory of the European Union and the Eurozone in particular, which I think is under some stress, as a result of the way the crisis has been handled. Thank you.

Dr Robin Niblett CMG

Thank you very much, Philip, for those remarks. You covered the waterfront, as I would expect, and very well raised a lot of important questions and, you know, I thought some relatively strongly made points at the beginning. The comment about, that people shouldn’t be intimidated into silence, and I’m talking about the economic dimensions of this crisis, even though, as you said, it is a health crisis in its current format. And that the public may have been sort of anaesthetised for the moment, but when they wake up, back to the points you were making at the end, they will wake up with concerns about jobs, their children’s future, etc. So, our government is going to have to make a very complex pivot.

Before I turn to Jon Symonds and DeAnne Julius for maybe some – one or two comments on your remarks, there was just – let me just pull in one question. I’ll just keep it very specific for the moment, ‘cause then we can go big into some of the global issues, but Aubrey Allegretti from Sky News asked this question, “How long do you think the Treasury, in a way, can keep up this ‘do whatever it takes’ type of funding?” We went into this, luckily, with the deficit now, what? Little under 3%, 2%, heading very much in the right direction. But projections of it potentially exploding to a level higher than it was under the global financial crisis, above 10% potentially by the end of the year. If you were in the Treasury, I mean, how does one gauge how long, I mean, how much is in the tank and how credible what is in the tank is? Could you just say a quick word about that?

The Rt Hon Philip Hammond

Yeah, I think it’s a very different situation from 2009. In 2009, we had to recapitalise financial institutions. What we’re talking about here is essentially liquidity support to the economy. The big challenge for the government, and the government can keep doing that for a short to medium period of time, of course it eventually has to be repaid. But the government is right to try to prevent long-term damage to the economy. But on the other side of the equation, we will – our economy will be different after this crisis and there will need to be restructuring and the government will have to be prepared to tell people that the high levels of support that are currently being provided cannot be provided forever. And they cannot prevent an essential restructuring, as businesses that have become non-viable have to fail, and jobs that have become non-viable have to go. And that point will come, and I think it’s probably more of a political challenge than a fiscal challenge because we can’t keep the economy shut for long periods of time. And in the short-term, what the government’s doing is perfectly sustainable and manageable, although we shouldn’t delude ourselves that it will have a consequence in the longer-term. There will be less fiscal capacity available for some of those laudable objectives that this government set out, was it really only five or six weeks ago? in a Budget.

Dr Robin Niblett CMG

And just to – another, sort of, short-term direct question, sorry, I didn’t have time to write down who this one came from, but it was thought an important question. “How ready do you think British households are, and one could maybe apply this across many Western countries, for this crisis?” You know, we’ve got used to an era of low unemployment, but that low unemployment’s been combined, it looks like, certainly looking to the United States, to a certain extent to the UK, with people with very low savings, living in a slightly ‘just-in-time’ financial situation, which was fine, so long as the economy was floating forward, but debt, personal debt, was starting to build up again. How worried are you that in a way, households are vulnerable going into this crisis? Even if, you said, it’s very different from 2008.

The Rt Hon Philip Hammond

I think we should be very worried about that. There is a significant lack of resilience in the household sector. I can’t remember the exact figures, but something like 50% of households have less than £1,000 of savings. And so, unavoidably, when a crisis like this arrives, households look immediately to the government and expect a very comprehensive social safety net. Now, that is fine, and that’s broadly in line with what’s been provided across Europe. But if I may, I would just make the point that it’s quite a long way away from the sort of image of a newly resurgent Britain, striding the global stage, taking on the Asians and the Americans in head-to-head competition. When the chips are down, the instinct of British Politicians and, I suspect, the British public, is very much in what I would call the ‘European welfare state-ist mainstream’, to look to the government to step in and protect them.

Dr Robin Niblett CMG

And I’m just going to let my colleagues know that I want to bring Jon Symonds in, in a second, but just so they have a chance to get that ready. Just one more question, David Walker asked the question about, you know, Christine Lagarde has talked that it might take ten years for folks to recover, for the global economy to recover in a real way. Are you worried that this is going to have – you talked about scarring, which is a phrase that’s been used quite a bit recently, that it could have that kind of a long-term affect? I’m sure we’ll get into this more in a minute, but could you just say a word about that quickly?

The Rt Hon Philip Hammond

So if we are able to develop an effective vaccine or a treatment, so that we can put this behind us, I would expect the global economy to – and if we avoid spiralling into a sort of trade war death spiral, then I would expect the global economy to recover more quickly from this crisis than it did from the financial crisis. But if we don’t find a vaccine, or a cure, and we have to adapt the global economy to living with COVID, then I think it’s far too early to say what the longer-term impacts of that may be. Because we don’t know yet how dampening of economic activity and growth the necessary restrictions would be.

Dr Robin Niblett CMG

That sounds like a perfect segue, if I may say, Philip, to Jon Symonds. Jon, welcome to this call. Thanks for joining us, and I think having somebody who brings both a business and a medical background, in a way, you’re sitting on the two sides of that balancing act that Philip Hammond’s been describing, that Politicians and the economy as a whole is going to manage, and I thought it was very interesting what Philip said at the end there. It really depends what we’re going to have to live with. The economy should be able to bounce out relatively quickly, but it depends so much on how we manage – how we’re able to manage the long-term effects of this particular virus. Why don’t you share just a couple of thoughts, maybe of things you’ve picked up from Phil Hammond’s comments and one or two you might want to make yourself? If I do ‘this,’ it means we’re coming to the end of your intervention. Go ahead.

Sir Jonathan Symonds CBE

Okay, thank you, Robin, and Philip, thank you for raising what I think are really very big questions and I think it’s important that they are recognised as big questions. This is not an issue that is trivial, in any sense at all, and it will have foundational consequences, and I don’t think modelling is going to resolve the question. These will be hard, hard judgements to take. I think where I am optimistic, there will be a vaccine. It was – the genome of the virus was sequenced very quickly, and the world has been working on vaccines for some time. In my 30 years in the industry have never seen such a collaborative approach being taken. GSK has seven collaborations across the world. We’re sharing all of our expertise, all of our technology.

But I think the point you finish with, that we will be living with COVID, is the right one. It’ll be 12-18 months before there is a vaccine, and maybe longer before it’s available at scale and therefore, there is no sequential resolution of the health issue before you move to the economic issue. They are intertwined and as a result, judgments are going to be – have to be taken, and I think the point that you raise about an open, collaborative dialogue is really important. I don’t think Politicians or businesses can resolve this, without agreeing together what the appropriate risk-based steps are. We will get some steps wrong, we’ll move too quickly in some areas, and too slowly in others and it has to be a debate that people are engaged on.

Firstly, I think, in terms of the demographics that you raised. We will increasingly understand who are at risk and who are invulnerable, and we can increasingly protect that part of the population. The more protected they are, the more confidently other people can go about business in the new normal. And I think, you know, we also need to understand that to be able to allocate what will be scarce vaccines and so there will be a complex arbitration process.

I think the economy, as you say, will be different and I think we need to embrace that today, and recognise how we compete, how we perform, how we succeed, in an economy that is not as open as it was before because, you know, we will live with this. It is not going to go away, and we will have to make economic decisions in the absence of hard insight. Perhaps I’ll leave it there, Robin.

Dr Robin Niblett CMG

Thanks very much for those comments, Jon, and I think this point you made right at the beginning, that even if there is a vaccine, we’re going to be living with, probably, COVID-19 or its successors or whatever in some way. So, there is no pure going back to business as usual in this space, never mind all the other many areas in which life has been disrupted, which Philip Hammond referred do. Philip, did you want to come back quickly on any of those points, and then I’m going to turn to DeAnne Julius? But I’ll give you the option, if you wanted to come back on one point quickly.

The Rt Hon Philip Hammond

No, I think I agree with everything Jon has said there and let’s hear what DeAnne’s got to say.

Dr Robin Niblett CMG

Well, thank you very much indeed, DeAnne, also, for joining us. It’s a pleasure to have you on this call and I’m sure you’ll be bringing us somewhat of an international perspective, as you’ve always done for us at Chatham House. But I’ll let you jump in on the back of any of Philip Hammond’s comments that you wanted to pick up, or any particular insight you wanted to share here with the group.

Dame DeAnne Julius DCMG CBE

Well, thanks very much, Robin, and thank you, Philip, for a really thought-provoking view on what the world economy may look like and the problems we’re going to be facing in the future. I think I was particularly struck by the fact that you took a very – what I would consider a negative scenario. Now maybe that’s because it is always better to hope for the best and plan for the worst, as they say. But I do think that there’s some danger in spending too much time thinking about the really negative scenario, if the probabilities are not very high. Of course, we Economists can’t really estimate those probabilities. It’s up to the Epidemiologists, I’m afraid, and Jon’s people to let us know just how optimistic or not we should be on the health aspects. But certainly, I too spent some time in the pharmaceutical industry, on the Board of Roche, the Swiss company, and I was continually struck by just how creative and brilliant many of those Scientists are. With so many of them working on it, with all of the relevant experience in other types of treatments, which may or may not work for this particular virus, I think there’s a pretty good chance that we’ll be making some progress on the medical front, sooner rather than later.

Having said that, though, I think it is important to think about a downside. I don’t believe that it’s particularly useful for government to provide the base case that business uses. Now, maybe this comes from my time in the oil industry, at Shell, where we always used scenarios, but I do think this is a classic scenario case. There really are at least two ways this could develop, and probably a few in the middle. It could be that we are 18 months, two years away from a vaccine and nothing will come up in the meantime. Through experience from other countries and how they exit their lockdowns to help us, but I think it’s also reasonably likely that we’re in the pit, in the trough, of the problem right now, that some of the fiscal measures that have come into place will indeed, cushion the effects on households and indeed, even the effects on businesses. I think many of them are well engaged, as I’m sure you all know, are well engaged in their own scenario thinking. There are a few, I guess you’d say silver linings to this very dark cloud. Everybody has had a crash course in how to use IT for businesses, for – I don’t know when Chatham House will be reopening, but I hope it’ll continue doing this sort of thing, because it’s actually quite easy for us not to have to commute into that part of central London, even – especially when the traffic comes back.

But these are efficiency gains, and I think there are some benefits in a little more homeworking, and a little less business travel, if one can do it over the IT systems. I know one company I’m involved with, in the commercial office space, is thinking very hard about whether we’re all going to need such large office space in the future. So, there’s plenty of scenario planning about business models, at least, going on right now and I think that what is necessary for business is indeed real transparency and data. Not just from our government, but from governments in other countries, so that they can have very good information on which to base their scenarios.

I guess I’d just finish, ‘cause I see Robin waving at me, by saying I think there is certainly a role for government, though, and part of it is bolstering some of the international co-operative areas that are there, whether it’s trade, or the World Health Organization, which the Americans have apparently abandoned, as it is part of the solution, but I think it certainly must be part of the solution in this crisis, and those are the things which I think, on the international front, governments can really help with. Thank you.

Dr Robin Niblett CMG

DeAnne, thank you. It was a gentle wave, it was just a little, you know – but thank you very much indeed. I’m just conscious – I’m keeping an eye on time here. But we’ve got a good 25 minutes to be able to continue. But DeAnne, thank you very much for those remarks and for pointing out this kind of balance, as you said. We hopefully don’t need to be too pessimistic, and there may even be, as you said, efficiency gains and ways of not going back to business as usual that over time will become beneficial. Philip, if I can come back to you with – and use DeAnne’s comments there, and I’ll let you come back, if you have some points you want to come back to on her remarks. But there was a question right at the beginning, which was pretty much at the top of the list when it started, about whether – we’ve almost moved into a form of universal basic income. We’ve been tipped into it by the way this crisis has panned out. With all the fears that were emerging about automation knocking jobs out and, as DeAnne was saying, we’ve made now a rapid move, an acceleration, in a way, into a technologically different type of way of working. I mean, where do you sit on the whole universal basic income concept? It’s a bit of a catch-all phrase, and you probably want to unpick it.

The Rt Hon Philip Hammond

Well, look, I am sceptical. I understand the superficial attraction, but I – when – I’ve always been wary of a world in which governments takes more away from people, in order to give it back to them and involves itself in the recirculation of resource. Obviously, government has a role to play in redistribution. But I am very sceptical about structures, which involve the government taking money from people in the middle-income bracket in order, simply, to give it back to the same people. So, there’s no doubt in my mind that this will give a boost to those who are arguing for something along these lines. But I’m gently sceptical myself.

I would just like to make two points about the comments that DeAnne made because I wasn’t – I don’t think it’s my role to paint a negative scenario. I’m simply noting that Scientists are telling us that we should not assume that a virus – that a vaccine will be discovered that is effective, and even if it is, it may be some time away. And the reason that I consider that we should start scenario planning for a world in which we have to live with the virus without a vaccine is that if we take the opposite view, that there will be an effective vaccine and then everything will be alright, I’m afraid we’re going to play right into the hands of those who would wish to suggest that the economy remains locked down, broadly along current lines, until such time as we have the belt and braces of a widely available, effective vaccine. I don’t think we can afford to do that. I think we’ve got to start reopening the economy, and I think the sensible compromise is to reopen around a set of conditions, which assume that at least for the time being, we are co-existing with this virus rather than conquering it. And DeAnne also raised the question of whether the government should provide the sort of base case scenario. I completely agree with her that business is quite good at working out these scenarios for itself. But the bit that government will have to offer up is the likely regulatory environment, because governments around the world will have views about how much control they want to retain over the economy, over the health situation, and how much they want to restrict the freedom of businesses.

But I’ll just finish by making one further point. Government is part of this, but we are another part of it, and I suspect in the end businesses will find that they will be more affected by changed behaviours of it than they will by regulatory impositions from government. DeAnne talked about maybe a little less business travel. Well, that’s fine. But if you’re a, you know, a hotel operator or an airline, a little less business travel could be the marginal blow that tips you over the edge. And of course people in commercial real estate, already reeling from what is undoubtedly another blow to retail real estate, will now be thinking – will now be asking themselves whether the functioning of the technology in this crisis means that this really will be the time when we change our behaviours. We’ve said many times before, “This’ll change people’s working patterns forever,” and it hasn’t. But perhaps this time it will. I certainly, personally, having been forced to master the technology of the videoconference, will be much less likely to get on a plane or a train to go somewhere than I will be to dial people up on a videoconference.

Dr Robin Niblett CMG

Thank you very much for those comments and we’ve had a lot of questions coming in, and a lot of them are quite international and taking advantage, Philip, not just of your kind of Chancellor role, but also your Foreign Affairs and Defence role. So before – I’m just going to pivot to that in two minutes or so. We can try and leave the last 15 minutes to go into foreign policy in a big way. But I thought this was a very important question that came up, and maybe this is an unfair question to give it to you, but you’re here, so I’ll give it to you in any case. If you had to sort of weigh up the risks of heading towards an inflationary spiral in the future, a deflationary spiral, or even stagflation, you have so much money being pumped into the economy, if there is a quick recovery of some sort, it could knock itself over. Or a lot of money going in, but not enough supply picking up the economy, you could lead to stagflation. I mean, have you thought this through a little bit? And if you had to sort of share with our members here where you’d put your biggest worry in that nasty trio, do you have one you’d have at the top of the list?

The Rt Hon Philip Hammond

Well, in the short-term I would worry a little bit about inflationary pressures. We’re – certainly in the UK, we’re largely supporting household incomes, and yet, household consumption will have fallen quite sharply, as there are all sorts of things that people can’t spend their money on and as you say, there’s been a very significant monetary and fiscal stimulus to the economy. But in the long run, I guess since we’re facing the demographic challenge that we are, across the developed world, one might say that that inflationary stimulus may be a welcome counter to what, overall, will be quite a strong deflationary pressure from the demographic profile that we’re facing across the advanced economy world.

Dr Robin Niblett CMG

Let me take you, Philip, into a couple of the more foreign policy type questions. You won’t be surprised by this pivot. We’ve had at least two questions, and a high ranking for ‘the China question’, which is, you know, grabbing every – as it was, even prior to COVID, there was that sense that there was a real shift in public and political opinion, in response to the more centralising, more authoritarian instincts and actions undertaken by the Chinese Government. There’s a question, actually, from the Sydney Morning Herald, which I think tells you the kind of reach one can achieve right now through these types of meetings, quoting Dominic Raab as saying last week that “Business can’t go on as usual with China after the pandemic.” That’s a big phrase. The question is, what might it mean? There’s been some pretty firm language coming from the Foreign Affairs Select Committee. Obviously, from the United States, and President Trump and many people round him, on a bipartisan basis as well, on the Democratic side. When you look at ‘the China question’, if I may put it in that big way, is – could this be a really important big pivot or not? Let me just start with that. What’s your sense?

The Rt Hon Philip Hammond

Well, I think it’s another factor in what is becoming a very difficult question for countries like the UK. I mean, all European countries find themselves increasingly squeezed between the two great power blocs. They – you know, we have three big economic powers in the world: US, European Union and China, and two strategic powers: the US and China. And Europe, with a large economy, a large, developed economy, but really, absolutely no strategic power at all to defend those economic interests, has found itself squeezed, and is likely to continue to find itself squeezed. And my view has always been that from the UK’s point of view, as a medium-sized, very open trading economy, we simply can’t allow ourselves to be forced to choose between having a trading relationship with the world’s largest economy and a trading relationship with the world’s second-largest economy. We’ve clearly got to have pragmatic business relationships with both.

Now, I think what we’re seeing here is not an event, but a trend, of an increasing awareness of the challenge to the established global norms that China’s rising importance means. China is a very different country from the UK or the US. We run our affairs in a very different way. There’s a very different relationship between the State and the individual and it is natural that we are wary of a country with such very different history, cultural and social and political norms as ours, from becoming a bigger and bigger voice in world affairs. But I’ve always taken the view that we have two choices. We either work to engage the Chinese and try to accommodate their legitimate demands for a role in the global system, and we contain China’s emergence within the infrastructure of the global economy and political system. Or we rebuff China and invite China to use its economic and, increasingly, its strategic muscle to develop a system of its own, which would be in contradistinction to the existing global order. My personal view is to favour the former approach, unless and until it proves impossible to deliver.

Dr Robin Niblett CMG

Do you think, just picking very specifically on this, this changes the political calculus, including for governments, whatever they may think would be the right approach, but the pressure is becoming very strong? Having such dependence on China in supply chains, which again has been reminded here, in the US, figures of over 90% of pharmaceuticals being made in China. Obviously, huge dependence being shown on PPE-type equipment and so on. This quickly tipped over into Huawei-type space and into the…

The Rt Hon Philip Hammond

Yes, it does.

Dr Robin Niblett CMG

…Institute of Infrastructure and Technology. So even if you had the question of whether it’s a security risk, which the British security services seem to have concluded, at least a majority opinion is not, you end up with a supply risk and a dependence risk. And I’ve heard the case made very strongly that one has to reduce dependence without, obviously, shutting off the thing entirely. What do you think about that pivot?

The Rt Hon Philip Hammond

Well, I agree with that, and I think that one of the lessons we’re going to learn from this crisis, and it could have come from a different type of crisis, it could have come from a shutdown of global transportation for some reason, is that highly efficient supply chains lack resilience, almost by definition. But in a ‘business as usual’ world, highly efficient supply chains represent a competitive advantage. So, if we are going to mandate greater resilience, less efficiency, we really have to find some kind of international framework within which to do that and there are different ways in which we can improve resilience. It might be reshoring of manufacturing through automation. I think quite a lot of that is likely to happen anyway, in an economy where labour cost becomes less important and carbon footprint becomes more important. It will make sense that some parts of the economy are going to go back to what has been the norm, for hundreds of years, that things are made close to the final consumers.

But we might also look to the source of the problem. We might say to the Chinese very frankly, “We are not comfortable with the level of exposure we have to these China-dominated supply chains. What are you going to do about it?” And one option is for the producer to commit to holding much, much larger buffer stocks of important items close to the markets that they serve. So, there may be more than one way of approaching this problem. But I don’t think we should be shy in setting out what the problem is. But we also have to do it eyes wide open, knowing that there will be lots of protectionists and ne’er-do-wells trying to sneak in under cover of this debate about supply chains to roll back globalisation in a way that is damaging and unhelpful.

Dr Robin Niblett CMG

So, let me – I’m going do an awkward swerve here, but I just want to make sure we don’t end up with not enough time to address this question properly. But again, one of the top questions on our list here was what the whole COVID crisis might mean for the pace of Brexit. Brexit has happened and since the UK has already left the EU, it is no longer a Member. But we have a deadline coming up at the end of June, and if I remember rightly, it’s already gone into pre-COVID mist, slightly, in my mind, where the government has to have decided by then whether it wishes to ask for an extension at the end of the year or not. What’s your sense on this? Because obviously, we’ve got, as you said, you’re trying to provide predictability, at the beginning, to business. Here’s a second element of unpredictability or maybe it is to give predictability, to say, “We stick with the end of the year.” At least business knows where it stands. What do you think the probabilities are, and what would your advice be?

The Rt Hon Philip Hammond

Well, first of all, it’s obviously very much in everyone’s interests that we reach an agreement with the European Union to enable tariff-free, quota-free trade to continue between the UK and the EU. That becomes a – it was always difficult in the timescale. It becomes much more difficult because of these circumstances. My own view is that the UK economy and the whole European economy has taken a significant shock. I think it would be unwise to contemplate imposing on the UK economy a second potential shock, within a short period of time, that would leave us at a competitive disadvantage, comparative disadvantage, with our trading partners and neighbours.

That said, the government has been very clear from the outset that it did not want to extend the transition period. I think this is not entirely black and white situation. I can envisage that it might be possible, for example, to agree with the European Union, in a sort of quick and dirty manner over the next couple of months, an interim trade arrangement, which is not the transition period, ends the transition, sets up an arrangement that will protect tariff and quota-free trade on a temporary basis between the UK and the EU, recognising that that arrangement will have features that, perhaps for both sides, would not be acceptable or attractive in the long-term, but at least gives us a breathing space to get over this crisis and to have some proper discussions about the long-term arrangements between the UK and the EU.

Dr Robin Niblett CMG

Let me again just jump around some of the other questions that I’ve seen noted here. Quite a few questions about the future of the EU, and just to use, again, your experience in particular in the Treasury but also, in the Foreign Office. Very difficult for the EU to weave its way through what have been a series of national responses, principally, given the responsibility of nation states and governments for health provision. But a kind of collapse of the Schengen Agreement, a refusal to agree ‘coronabonds’, as they’re rather unpleasantly described. But, nonetheless, in true EU style, some muddling through on greater financial means through the ECB and the European Monetary System. Any case, that’s enough setup. Where would you sit – is this an existential moment for the EU, because that matters for the UK as well or do you think this is – you’ve seen this script before, and the EU kind of muddles its way through? Where do you sit on that balance? You know, into another crisis between the North and the South, or something different?

The Rt Hon Philip Hammond

Well, I think for advocates of the ‘European Project’, the way in which everybody has instinctively reached for national government solutions is a deeply uncomfortable reminder to them that Europe is a successful association of nation states. It isn’t a super-state. I don’t honestly think there’s an existential threat to the European Union, but I do think there’s a very big challenge to the Eurozone and the single currency. Because at the heart of the single currency is this conundrum: that history tells us you can’t have a single currency, without a single political entity devising a single fiscal strategy that operates across the whole of the single currency zone. And we’ve had crises before that have brought this challenge into sharp contrast and the European – the Eurozone has fudged them and moved on. But this crisis has done so again. It has brought into very sharp focus the question, “What is the single currency all about?” It was supposed to be a tool for bringing the European economies, the 19 economies, closer together. A tool for convergence and yet, without shared fiscal risk, and in the form, for example, of coronabonds, it’s difficult to see how that convergence is being delivered and I think that’s a very big challenge for the Eurozone.

Dr Robin Niblett CMG

Thank you, Philip. I’m going to try and – ‘cause I’ve been looking at the Q&As. Some things have jumped to the top, which we haven’t quite got to, and I want to make sure we touched on those. So, I’ve got three closing questions in three minutes, so you’ve got a minute each. We’ll see how your parliamentary experience works on these.

Number one, you know – there was some lack of clarity for our audience here about what you meant about the prospects for dealing with climate change at the end of this. Do you think governments will be able to put less effort into climate change efforts, or more, because in a way, they have to provide that stability and certainty? And there may be a public demand for it, having lived with cleaner air and cleaner water, etc., what’s your take, first, on climate? And I’ve got two more questions after that.

The Rt Hon Philip Hammond

So, I think it’s an open question and you’re absolutely right, some people will take from this crisis that we can cut our carbon footprint, we can reduce our economic activity. Others will take a different lesson, that post the crisis we need to rebuild our economies very quickly. I don’t think that the advanced Western economies in Europe, for example, are going to change their trajectory. The speed may temporarily adjust, but the big question for me is with oil and gas prices very low, are we going to maintain the – can I say, always slightly lukewarm enthusiasm of the emerging markets for embracing the energy transition? Are they going to move away from coal? Are they perhaps going to go for gas, rather than renewables as an interim, which is that I think probably the nightmare scenario for those who are completely committed to the decarbonisation agenda? But a big economic shock, which causes people to recalibrate their priorities, must raise the question of which governments will remain fully committed to this agenda.

Dr Robin Niblett CMG

This brings me to a very important question. Here we are with SDGs. You talked yourself about the risk to developing countries. Suddenly, people will be looking at the 0.7% of the UK. What’s your sense of the prospects for the impact on emerging markets of commitments to the SDGs, commitments to FDI into these countries?

The Rt Hon Philip Hammond

Well, the emerging markets have of course been reminded very brutally how exposed they are to capital flows and I’m sure will be looking for greater resilience in the global safety net structure, to try and protect them at an earlier stage. Because it happened so quickly that even though IMF, for example, has now responded to the challenges they’re facing, already for many of them, very significant damage will have been done. I don’t honestly think there’s any real prospect that the UK will move away from its 0.7% commitment. The fact that it’s enshrined in law makes that all too difficult. If it was just a political decision from year-to-year, might have been a different question.

Dr Robin Niblett CMG

So, last question for you, and maybe the way to do it quickly, ‘cause we’re bang on 7 o’clock, is to do it the following way. If you had to rank between most powerful to least powerful in, let’s say, four or five years’ time, as this crisis has filtered its way through, one hopes, G20, US, China, which would you put as the most powerful and which would you put as the least powerful in that process, at the end of this crisis?

The Rt Hon Philip Hammond

Well, look, I mean, G20 isn’t a player in the way that China and the US are as strategic partners.

Dr Robin Niblett CMG

I was trying to use it as a shorthand for co-operation, but go on, you know what I mean.

The Rt Hon Philip Hammond

Yeah, but I do think there’s a huge challenge. If G20 is a shorthand for the international system, the currently recognised pattern of international collaboration, I think it was always difficult for the international structures to spin up very quickly in a crisis like this. But where they will really come into their own is in the recovery phase and I think that will be the big challenge. If G20 and the Bretton Woods Institutions cannot demonstrate that they are up to the challenge of co-ordinating, managing and supporting the recovery, then that will be a very big problem for them.

As to China and the US, look, I think we’ve got a long-term trend here. The Chinese economy is closing on the US economy, in terms of size. Whether it will actually get there, whether it will overtake the US economy, before China’s own demographic problems become a challenge for it, in sustaining economic growth, I can’t predict at the moment. But I think that is the big strategic debate, the big strategic standoff, that will dominate the recovery phase and indeed, the next ten/20/30 years of our history.

Dr Robin Niblett CMG

Really, I can’t believe we got through as many questions as we did, and to other interventions and we ranged very far and very wide. But again, reflecting the many positions you’ve held in government and of course, I’m sure a sharp eye to your own time in business as well. So, you bring that extra dimension to this. It’s been a really fascinating conversation. We’ve held over 300 participants, 300 plus, you know, all the way to the end, which I think is a reflection of how insightful people found your comments. Thank you very much indeed for making the time to put yourself through that process of questioning and sharing of ideas. I think on behalf of all of our members, and those guests who joined it, thank you very much. And thank you to all of our members for being with us this evening and for the quick change in time, which meant you could join the 5 o’clock government announcement. I think we’re going to] try to avoid that timing in the future and stick with this kind of later in the evening time, which I think suits probably our speakers better as well. If we could only unmute everyone and applaud, we would do that. I’m going to applaud, and maybe my colleagues, Ludie and Robin and Aaron might unmute. But, Philip, thank you very much. We’ll keep in touch, and to all of our members, we hope to see you again soon. But thank you very much for your time. Goodbye. Keep safe. Keep healthy. We hope to you in St James’s Square again before too long. Thank you very much indeed [claps].

The Rt Hon Philip Hammond

Thank you.