Sunday, May 24, 2020
Signs of life start to flicker in our lockdown economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

When, a few days ago, Rishi Sunak warned of “a severe recession, the likes of which we have not seen”, the surprise was that nobody was surprised. He was also able to say it without facing criticism. Among the many changes brought about by this crisis, the old rule that chancellors should always be upbeat, even when standing on the burning deck, appears to have been shelved.

I could not help contrasting it with the fate of Alistair Darling, a month before the collapse of Lehman Brothers in 2008. The then chancellor, now Lord Darling, told an interviewer that the economic times were “arguably the worst they’ve been in 60 years” and the situation was going to “be more profound and long-lasting than people thought”.

He was pulled up for his comments, partly because there was a more economically aware prime minister in Downing Street – Gordon Brown had been chancellor for 10 years – and partly because there was at least some room for doubt about what would happen; the big bank failures were yet to happen.

This time, with both the official forecaster (the Office for Budget Responsibility) and the Bank of England setting out scenarios which envisage the deepest recession since the early 1700s, a chancellor who tried to pretend that the economy was just suffering from a little scratch would risk his credibility.

Jim Callaghan, Labour chancellor in the run-up to sterling’s 1967 devaluation, once described the deeply disconcerting feeling of seeing Britain’s currency reserves pouring away in a vain attempt to defend the pound. Sunak is experiencing the domestic equivalent; bucketloads of money flowing out of the Treasury to support the economy during the crisis and tax revenues only trickling, partly as an element of that support.

The fiscal consequences of the crisis are becoming clearer. Figures on Friday showed that the government borrowed £62bn last month, more than the £55bn officially predicted in March for the whole of 2020-21. Retail sales volumes slumped by 18% last month.

The monetary consequences are also pretty clear. For the first time in its 326-year history, the Bank of England is contemplating negative interest rates; charging commercial banks to keep their reserves at the Bank. We are in a world, it seems, in which even a 0.1% Bank rate is not low enough, even alongside an expected additional £100bn of quantitative easing (QE) next month. Already the government has sold some debt, gilt-edged securities, at a negative interest rate.

I think the Bank should hold off from crossing this particular rubicon. The economic effects of marginally negative interest rates would be tiny, at best, and there are other things the Bank can do first, including that extra QE.

Whether the Bank can hold off from negative rates depends of course, on how the economy does. There is some evidence from economists that, even in the absence of a lockdown, economies would have suffered a significant hit, as people adopted voluntary social distancing and businesses responded to customer and employee concerns.

The lockdown legitimised such concerns, however, and the government’s behavioural advisers, having thought that the most difficult thing would be to get people to abide by the lockdown, now finds it is harder to get them out of it.

In some ways that is not surprising. Behind Sunak’s candour on the economy, you can sense a Treasury frustration about the lockdown and its economic effects. The furlough scheme, which was put together impressively quickly, was more widely adopted than expected; giving some employers the easier option of shutdown when they could have continued operating but under more difficult conditions. It has also made lockdown more comfortable for many people than they might have thought possible.

The question now is for how many people the furlough or job retention scheme has been a bridge back to normality, as was intended, and for how many an expensive way – for taxpayers – of smoothing the path to unemployment. We will know part of her answer to that at the end of July, when the full 80% scheme ends, and the full answer in late October, when partial support coms to an end. The furlough scheme was the right thing to do, though should perhaps have allowed employees to continue part-time, but may have contributed to a more complete lockdown than would otherwise have been the case.

There is a glimmer of light in the latest survey evidence. It has always been the case, as noted here, that last month was likely to represent the low point, the nadir, of the UK and global lockdown recession. This was when most of Europe and America were locked down for a full month. The easing this month could be expected to lift us off the bottom, if only marginally.

Sure enough, this is borne out by the latest purchasing managers’ surveys, which measure business-to-business activity. For the UK, the “flash” purchasing managers’ index (PMI) for services and manufacturing, which slumped to 13.8 last month, bounced back to 28.9 this month. It does not mean everything is hunky dory, far from it. Levels below 50 on the index are consistent with falling gross domestic product. But the rate of decline has eased and can be expected to ease further.

There is a similar picture in the eurozone, where the flash PMI has recovered to 30.5 this month, from 13.6 last month. These are stirrings, and they are not uniformly felt, but they could be quite important ones.

The Bank has been monitoring a series of real-time indicators, as has the Office for National Statistics (ONS). Some of the Bank’s indicators remain flat, but motor vehicle traffic has turned up, as have Google searches for cars.

The ONS found that of the businesses trading in its latest two-week period, 6% had started trading again in that period, including nearly a fifth in accommodation and food services. It also found that ship arrivals at UK ports, which had fallen sharply to mid-April, have steadied, and averaged 283 a day in the week to May 17.

I am also impressed with data from Quartix, a leading supplier of vehicle tracking systems, software and services, which looks at commercial traffic mileage by sector and compares the early-lockdown period – the week beginning March 30 – with the middle of this month. Every sector has seen a recovery though only one, mining and quarrying, is back above pre-lockdown levels. Most are down on normal, but by less than they were, notably construction, down half of what it was. Manufacturing is also a lot better than before, according to vehicle usage for the sector.

These are straws in the wind, some more significant than others, but they are important. They show that, even as many lockdown measures remained in place this month, there were signs of recovery.

There is, plainly, a long way to go, and the economy remains significantly below normal. But these are modest signs of revival. Sunak will be hoping his next pronouncement will be an economy gradually recovering from a profound shock