As we enter the third year of the pandemic, Brookline Bank President and CEO Darryl Fess shares his thoughts on the 2022 economy with Ann Murphy of Seven Letter/O’Neill and Associates. He touches upon issues including how the pandemic has affected the economy, inflation, supply-chains, labor shortages, commercial real estate, and the banking industry.
Enjoy by listening to the podcast or take a look at an abridged transcript below.
How do you see the pandemic figuring into the impact on the national and local economy during the next year? Will the new Covid surge derail the economic recovery?
Obviously, the pandemic is not gone. There are hopeful signs that the numbers are trailing off and things are looking up. Think back to the fall when people were coming back to the office, having social gatherings and then Omicron came out and put us where we are today with very few people going to their offices. The pandemic will continue to play an important role in the economy. Some original projections for 2022 growth in the economy called for a 5% or more increase. Now, pundits say perhaps a 3% increase, so the pandemic may have an adverse effect. The economic recovery is still ongoing and the return to work and social aspect of it are a bit postponed. There’s a pent-up demand for people to get out of their homes, back into the office, out to restaurants and things like that.
Will inflation continue to rise this year?
I don’t think inflation will rise a lot this year. The inflation rate has been higher than expected and came in at 7% in December, which is certainly higher than we have seen in a long time, and in some ways, I feel it is transitory. Some of the things that have played into inflation have been supply and demand issues with the disruption in the supply chain, and people maybe took advantage of it with raising their prices because they could get away with it. There was a trickle-down effect with employees saying they need to make more money. Inflation is a real thing, but I think it was induced by the pandemic and induced by federal spending that just pumped so much money into the economy that there was some natural inflation.
The biggest risk is that the Federal Reserve overreacts. The Federal Reserve could probably get away with a couple of warning shots and one, two or three increases in interest rates, and some people say they will do five. That worries me because I don’t think the economy is all that strong. It is hanging on pins and needles a bit and if they (Federal Reserve) get too aggressive, it could cause another problem for us.
What about supply-chain disruptions and their impact on the economic recovery?
There are real issues in the supply-chain. Partly, it’s because China has taken a very aggressive approach to Covid-19 and it will shut down an entire town or port, and basically stop things. On the other side of that is when cargo arrives here, there are not enough people at the docks to unload the container ships. These are things that can certainly hurt small businesses. It will settle out and we have seen some signs of settling but will take a while before the routine gets back to where it was before. That will probably coincide with the reduction in the virus.
Every sector of the economy has been impacted by labor shortages which are acutely felt during virus surges, what is in store for employment? Will more workers enter, re-enter, or disappear from the workforce?
The fact that unemployment is so low and that it is so hard to fine people is crazy. You would think it would be the opposite. A lot of people have left the workforce whether it is for personal issues, and they are looking at life differently, taking early retirements, or one parent is staying home to take care of kids. A lot of these are life choices and people reflect upon what the virus has meant to them. We may see some people come back (to the labor market) because retirement can get old quickly for certain people. There could be people returning to the workforce with increased salaries and incentives to do so.
One of the questions we asked you last year was about companies that were pushing for remote work environments to help with recruitment and retention, as well as to help reduce real estate and infrastructure costs. The pandemic has really changed the way we work and the way we think about work. Do you see that now becoming a way of life, working remotely?
Remote work and remote meetings are not going anywhere, and there will continue to be a lot more flexibility for employees where there is always an option for working from home. People didn’t like the long commutes and being stuck in traffic. In the future, they may be able to adjust their hours to come into the office and stay home when they need to. I am also a firm believer, especially in the financial services industry, that people should be together (in person) and on the same page because I feel it is necessary to our success.
What is on the horizon for commercial real estate as the demand for traditional office space has gone down?
The office market is still very much a big question mark. People will probably return to the office but not five days a week like they used to. Some companies may not need as much space. People who coming into the office three days a week still need their offices, so it doesn’t reduce the need for space. Every company will be a little different and there’s a lot of uncertainty there. Expansion of the economy and alternative uses will take up some of that space.
What changes implemented by the banking sector in response to the pandemic are likely to become permanent?
We are already seeing that things have changed as a result of the pandemic. Our clients will continue to utilize more electronic banking services. We introduced a new website that is the same on your mobile devices as it is on your computer screen. We introduced a new online banking system which is as good as any of the large banks have in terms of technology and the ability to do financial planning and account opening online. When I look at usage of Zelle and other electronic forms of payment, they are skyrocketing. I think people will use continue to electronic services and come into the banks less frequently.