The Economist - UK (2022-02-19)

TheEconomistFebruary19th 2022 Finance&economics 65

roughlyashighasit wasinearly2019,even
asunitlabourcostsarerisingbyabout3%
peryear.Labourseemstobewinningoutat
theexpenseofcapital.PerhapsMrBailey
hasa point.
Thesecondgroupconsistsofmostoth­
errichcountriesoutsideAmerica.There,
neitherlabournorcapitalseemsabletotri­
umph.Aftercorrectingforpandemic­re­
lateddistortions Japan’spay growthap­
pearstobeslowingtobelow1%a year,sug­
gestdatafromGoldmanSachs,a bank.Pay
settlementsinItalyandSpainaretreading
water, while wage growth in Australia,
FranceandGermanyremainswellbelow
whereit wasbeforethepandemic.Workers
intheseplacesarenotreallyjoining in
withtheinflationaryparty.
Butbusinessesarenotsoaringeither.In
Europe pre­tax profit margins, as mea­
suredinthenationalaccounts,haverisen
inrecentmonthsbutremainbelowwhere
theywerejustbeforethepandemic.InJa­
panthe“recurring”profits beforetaxof
large and medium­sized companies re­
cently returned to pre­pandemic levels.
Theprofitsofsmallercompaniesremain
wellbelow,however.
InthethirdgroupsitsAmerica.Here
wagegrowthisrapid,atabout5%a year.
Butasshownintheirmostrecentfinancial
results,biglistedAmericancompaniesare
doingabetterjobofprotectingmargins
thananalysts had expected. A series of
unusuallylarge stimuluspayments may
meanthathouseholdsareabletoabsorb
thehigherpricesthatcompaniesimpose.
InearlyFebruaryAmazonsaidit wouldin­
creasethepriceofitsPrimemembership
packageby17%initshomemarket—even
asitchosenottoannouncepricerisesin
otherpartsoftheworld.
Somefirmsareincreasingtheirmar­
gins despite soaring costs. Tyson, an
Americanmeatproducer,reportedan18%
jumpinthecostsofitsinputsinthemost
recentquartercomparedwitha yearearli­
er,a 19.6%increaseinitsaverageselling
prices,anda 40%riseinitsadjustedoper­
atingprofits.Itsaysthatrisingmeatprices

havenotsloweddemand.

An economy­wide measure of cor­

poratemarginsisrisingfast.DarioPerkins

oftsLombard,afinancial­servicesfirm,

breaksdownAmerica’sriseinunitprices

sincethestartofthepandemicintocom­

panies’labourcosts,non­labourcostsand

profits.Wagesarerising,butnonetheless

markups are responsible for more than

70%ofinflationsincelate2019,hefinds

(seechart2).Ina recentreport,analystsat

BankofAmericaarguethatgreaterpricing

powerhelpsexplainwhyAmericanequi­

tieshavea higherprice­earningsratiothan

Europeanones.

Good,you’reallunhappy

Thestoryisnotoveryet.Someeconomists

wonderif workerswillbeforelongdemand

evenhigherwagestocompensateforhigh­

erpricesintheshops.Thereissomeevi­

denceofthisinAmericaandBritain,where

wage growth seems to be accelerating.

Businesses’expectationsforfuturewage

settlements remain fairly conservative,

thoughthatcouldsoonchange.If wagesdo

starttogrow morequickly,thecycle of

price rises and compensating wage de­

mandsmightstartupalloveragain.Before

long the post­lockdowneconomy could

lookliketheultimatecompromise—where

nobodyissatisfied. n

Roaring back

United States, companies’ costs and profits

2012 average=100

Source:BureauofLabourStatistics

2

130

120

110

100

90

80

21191715132011

Unitprofits

Unit non-

labour costs

Unit labour costs

Workers of the world...

OECD countries*, share of GDP going

to workers, %

Sources: OECD; World Bank; The Economist *3 countries



54

53

52

51

50

49

2000 05 10 15 21

Businessdistricts

The true cost of empty offices

C

ities haveoften  bounced  back  from

crises.  From  pandemics  and  earth­

quakes  to  floods  and  fires,  the  world’s  ur­

ban  powerhouses  have  emerged  stronger

when faced with adversity. After the Great

Fire  of  London  destroyed  most  of  the  city

in 1666 a raft of fire­safety regulations were

ushered  in.  Builders  swapped  timber  for

brick  or  stone.  Walls  were  made  thicker.

Streets  became  wider.  When  cholera  tore

through  America  in  the  1850s  New  York

and  other  cities  introduced  sewage  sys­

tems  and  public  parks.  As  the  disease

spread to Paris, authorities there too intro­

duced  radical  public­health  measures.

Tree­lined  boulevards  were  built,  foun­

tains were erected and slums were cleared. 

Today’s urban areas face a challenge of a

different sort. With the mass return to of­

fice work still uncertain, the pandemic has

sharpened  debate  about  what  the  future

holds for their commercial hubs. Key busi­

ness districts such as Manhattan, the City

of London, Tokyo’s Marunouchi and La Dé­

fense  in  Paris  have  borne  the  brunt  of  the

office  exodus.  Before  lockdowns  the  21

largest business  districts  in  the  world

housed 4.5m workers and around a fifth of

the  headquarters  of  Fortune  Global  500

companies, according to eyand the Urban

Land Institute. When covid­19 emptied of­

fices around the world, most professional

work shifted to home offices or kitchen ta­

bles. As the pandemic stretches into a third

year, the fate of urban business districts re­

mains unclear. Can they continue to attract

investment  and  talent  or  will  new  work

patterns  jeopardise  their  commercial

dominance?

On the face of it, things could have been

worse  for  the  owners  of  gleaming  city  of­

fice towers. Unlike the retail and hospitali­

ty sectors, office tenants have mostly con­

tinued  to  pay  rent  and  analysts  have  re­

tracted  many  of  their  worst  projections.

Leasing  activity  even  picked  up  in  cities

like London towards the end of 2021. 

The  reality,  however,  is  far  from  rosy.

Home­working  has  hit  demand  for  office

space,  with  vacancy  rates  rising  faster  in

business  districts  than  anywhere  else.

Globally, unoccupied offices make up 12%

of  the  total,  up  from  8%  before  covid.

Across London 18% of offices are vacant. In

New  York  the  share  is  nearly  16%.  More

than one in five offices in San Francisco are

empty.  In  Hong  Kong,  where  downsizing

has  become  common,  net  effective  rent,

which is adjusted for abatements or incen­

tives,  dropped  by  more  than  7%  in  2021

after falling by more than 17% in 2020. 

Rather  than  lowering  rents,  landlords

Commercial hubs have been hit hard by the pandemic. Is the answer more

flats and festivals?