James Pomeroy - HSBC Chief Economist joins Yahoo Finance's On The Move to discuss his new report: The Booming Digital Economy, and outlines how digital consumption in the global economy, which was rising before the crisis, has been propelled dramatically due to the virus.
ADAM SHAPIRO: Back to "On the Move," we all are working in different ways because of the pandemic. And one thing to pay attention to is how the pandemic is transforming the digital economy. To help us break that down is James Pomeroy, HSBC's chief economist. And you folk are out with a new report. There's so many things that we're all trying to glean from the experience we're living through right now. What do you think is going to be permanent? Because we know that coronavirus has accelerated our transformation to a larger digital economy, but what's going to last after there's a vaccine?
JAMES POMEROY: Yeah, I think it's interesting. I think there's a whole load of trends that have clearly been accelerated as a result of the pandemic, but I think what's really important to think about is how much further they could run. And the one that I think is most interesting is the amount of online shopping we're all doing. And we had a bit of a taste of that during sort of August and May, particularly here in the UK, where sort of about a third of retail sales were online.
So we put together this report, and we looked at a fair bit of data and said, you know, how far could this actually run, and what happens if all of the changes we've made in our lives in the last sort of six months or so become much more permanent and we started to think, well, actually, maybe I'll keep buying that online, or maybe I'll keep using these digital services?
And you add together that with some of the demographic trends, and we're talking about maybe by 2030 we could get as high as 50% of retail sales being online, which is quite a transformation from where we are today, even in a sort of just after the pandemic world. So I think there's something that investors and companies have got to start thinking about very seriously, and the idea that we could move to a much, much more digital economy even than we are today.
JULIE HYMAN: James, it's Julie here. Just one very small bit of anec-data, I shopped in person over this weekend, I bought a pair of pants, and it was such a delightful experience after all of this online shopping I've been doing over the past six months. But leaving that aside, from a sort of bigger macroeconomics perspective, I know one of the effects, not necessarily of online shopping specifically, but in part, is that you think inflation will be subdued as we see some of these more permanent changes from the digital economy. Walk me through that, because online shopping is not necessarily always cheaper for the producer, right? Because of shipping costs and such. So how does that work?
JAMES POMEROY: Yeah, exactly. There's a few things that come into this. I mean, firstly, it may be slightly more expensive to provide that digital service, as you say, with shipping costs, but those shipping costs are coming down. So you're starting to see this sort of slowly sort of depleting sort of costs for businesses of doing it, but also, it's much, much cheaper to have a warehouse and ship things out of there than it is to have a bricks and mortar store. And unfortunately, there's a labor market implication here, as well, but it's cheaper in terms of staff and in terms of those sorts of things.
But for me, the biggest change is in terms of consumer price information. And if you're shopping in your store and you like a product and you want to compare it to a price elsewhere, you have to physically go to the next store, whereas online, you can just go, oh, well, what's the price here, what's the price here? You can use price comparison websites. You can use things such as Google Shopping, all of these different things.
That price information for consumers I think is really, really important in terms of creating efficiency in the economy, but it's efficiency that means you get a lower markup for businesses. And that lower markup means it is much, much harder to get a sustained pickup in inflation, particularly on goods inflation. And that's something that has played out over the last sort of four or five years.
Definitely in the economic data, there's a lot of evidence. That's been one of the main reasons that central banks have struggled to hit their inflation targets. And what we're saying is, if more and more online shopping becomes commonplace, actually that trend could persist for quite some time, and it may be much harder for central banks to achieve their inflation target if you've got the goods price inflation is largely zero in most parts of the world.
BRIAN CHEUNG: James, it's Brian Cheung here. Something else you point to is the-- I guess the factors of remote working, things like the automation trends that are likely to accelerate amid the COVID-19 pandemic. But to me, that sounds like it advantages those kinds of white collar, likely higher paying jobs, specifically at companies that are rich in capital and have a lot of cash on hand.
So I guess one way I was reading that was that this could speak to more consolidation in the industry, or maybe more beneficial headwinds for those specifically larger, maybe big tech companies. Is that a good way to be reading this, and what might the consequences of that be from a macroeconomic environment, you know, in terms of that type of scale becoming more valued?
JAMES POMEROY: Yeah, it's interesting. So just to tap on that first point, if you start to think about-- if you have a lot of businesses all over the world right now who are starting to think about, oh, maybe we should do a little bit more automation, you know, social distancing and trying to save some costs, those two things together, pretty good incentives to get some-- to do some automation right now.
That's really bad news for the labor market. Over the course of the next 6 to 12 months, you've got a lot of businesses who are not necessarily going to be bringing back the same number of jobs that they were previously. And I think that's going to be one of the biggest macro challenges for the next year, I think in pretty much every economy across the world.
And then you start to think about, as you say, some of the sort of potential winners here. And it's going to be those businesses who can save costs, those businesses who are able to digitize very readily, those businesses who are able to get people working from home on systems pretty well and pretty efficiently. And it does sort of play to this idea that you could get some of the bigger companies are big winners because they can adapt to this scale far more quickly.
And then people go back to me on the inflation point and they say, well of course, if you get monopolies, then that's going to lead to a pickup in inflation. But you also have to remember that, in the world we live in, with online consumption and with the likes of Amazon or eBay, Etsys of the world, you're creating marketplaces and you're providing this perfect competition. And I think that's actually quite encouraging, in terms of how this feeds through to the average consumer, that you could get some sort of consolidation in terms of businesses, some greater sort of competitive power, but that doesn't necessarily need to lead to higher inflation or prices for consumers.