Sunday, May 03, 2020
We'll have a different economy - but will it be a better one?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

The extent of the economic shock from the coronavirus crisis and government-imposed lockdowns is becoming clearer by the day. China led the way in reporting a slump in gross domestic product in the first quarter and now other countries are following suit. These are just the appetisers, if that is the right word, ahead of much bigger falls in economic activity in the current April-June quarter.

America’s 4.8% annualised drop in gross domestic production the first quarter (1.2% in the way we would measure it) was milder than France’s 5.8% fall (in the way we do measure it), Italy’s 4.7% drop and the eurozone’s 3.8% fall. We will have to wait until May 13 for the first quarter GDP figures for the UK, though the eurozone’s record quarterly drop provides a pointer.

Today, I wanted to deal with a couple of things. The first is a question I get asked a lot, which is why a temporary lockdown in the economy, lasting a matter of weeks or months, has such a devastating impact on the economy, the effects of which will last for years. After all, the economy goes into something like a lockdown every year for a couple of weeks over Christmas and New Year.

The second question is whether we can improve on the dull post-crisis outlook envisaged by economists, in which the loss of output during this recession is never fully made up and productivity continues on its weak, pre-virus path. Could the forced changes in the economy lead to the “creative destruction” that gives us a better balanced and more productive economy?

The economic effects of the lockdown will have been at their most intense last month, April, with gradual easings mainly happening this month in Europe, as well as a modest private sector easing, including housebuilding sites and some DIY chains, in Britain. That will not prevent huge second quarter GDP declines, of which the Office for Budget Responsibility’s 35% drop provided a template.

Even if this is followed, as is likely, by some spectacular quarterly and annual gains in GDP – imagine the percentage growth between a Q2 2020 economy severely limited by lockdown and a much less affected Q2 2021 – the impact will linger. This is because, thanks to this year’s slump, which takes a big chunk out of GDP, any future gains will be from a much lower base.

The National Institute of Economic and Social Research set this out well in its latest quarterly review, which has just been published. It predicts a smaller annual fall in GDP than the OBR’s coronavirus scenario, 7.2% rather than 12.8%, and a GDP recovery from the third quarter onwards, which delivers 6.8% growth next year. But the economy does not get back to its level at the end of last year until late 2021, implying that the coronavirus has cost two years of growth. Even by 2024 the economy is nearly £60bn smaller than was expected before the crisis hit.

Some people have looked longingly towards the idea of a “roaring twenties” for the UK economy as we come out of the crisis. But the 1920s, which we associate with the flappers and the jazz and radio ages in America, did not roar much for Britain, as another article in the institute’s review points out. After the slump at the start of the decade, we had Winston Churchill’s blundering return to the Gold Standard in 1925 and the General Strike of 1926.

If not necessarily roaring, the economy will certainly change. CIL, the consultants, carried out a consumer pulse survey among more than 2,000 people in the last week of April. They found that the things that people were looking forward to least after the lockdown that they cannot do now was going to restaurants, cafes, cinemas, entertainment and non-essential shopping. Apart form seeing family and friends, going to the gym, playing sport, and haircuts were the top priorities.

These may be temporary effects, but it feels as if something significant is happening, and social distancing is likely to be with us for a long time. The economy and employment have been supported in recent years by the strength of consumer services; the rise of the coffee shop, eating out and experiences. Retail employment has been falling for some time, and will take a further hit as a result of the high street casualties of this crisis, the list of which is growing.

Other things that we have come to regard as normal, like low-cost and convenient air travel, will look very different in future. British Airways is cutting 12,000 jobs and pondering its future at Gatwick for a reason. It will work both ways for the tourism sector. More British people will take staycations but the number of overseas visitors will decline. You would not want to be in the airline or travel industries.

All this could be balanced, to an extent, by “reshoring” of some manufacturing activities, made necessary by a reduction in airline traffic and the weaknesses of global supply chains and just-in-time manufacturing processes exposed by the crisis. Manufacturing is currently in a state of deep gloom, as a survey by Make UK on Friday pointed out. It described the sector in a state of “freefall”, with a likely drop in output in the second quarter of more than the 55% the OBR suggested for the sector in its scenario. It is hard to think of post-crisis revival when the numbers are so grim.

These are very early days. A decade ago, some people not only looked for a demonstration of the “trampoline” theory of recovery; the bigger the drop, the more convincing and sustained the bounce. They also looked for the “creative destruction” memorably described by the great economist Joseph Schumpeter, in which economies reboot for the better, as the weak and uncompetitive are driven out.

Neither happened. The trampoline lacked enough spring, and too many zombie firms survived the crisis. Will it be different this time? It might be. Consumer services have given the UK economy record levels of employment but alongside stagnant productivity. The rebalancing that may be forced on the economy in the post-crisis period may be associated with stronger productivity growth but persistently higher unemployment. A few months ago the unemployment rate was just 3.8%, its lowest since 1974. It could be a very long time before we see the likes of that again. The economy will be different. We have to hope that, in changing, it will be better.