Sunday, June 07, 2020
A groggy recovery is under way but the real test comes later
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.

On Friday, the Office for National Statistics (ONS) will publish its monthly estimate of gross domestic product for April. That may not sound like the most momentous event but stop all the clocks, cut off the telephone, it will be, reflecting a month in which the economy was almost dead to the world.

The crash in GDP in April will put the previous monthly record, March’s 5.8% plunge, in the shade. It will generate many headlines. But it is, if not old news, a reflection of how the economy was at time of maximum lockdown, not as it is now.

What we have seen since then is a gradual, if sometimes groggy, pick-up from those extremely depressed April levels. The latest purchasing managers’ surveys, for services, manufacturing and construction, show that activity, while still below normal, is less depressed than it was. The composite purchasing managers’ index rose from 13.8 in April to 30 last month.

The ONS, which has responded well in this crisis, is producing faster indicators on its effects. In businesses surveyed over the period to May 17, a quarter of those which had temporarily ceased trading intended to start again over the following four weeks, so many will done so, and a further 30% intended to restart after four weeks.

Shipping arrivals in UK ports, a new favourite of mine, are now on an upward trend, while one phenomenon at the start of the crisis – shortages and price rises for products that people were desperate to buy for the lockdown - has now pretty much disappeared. Things are not normal, but they are more like normal than they were.

Hudson Contract, a firm which provides payroll and other services to the construction industry, estimates that demand for labour fell by 70% in April, before rising by 40% last month as sites reopened. More generally, there are early signs of an uptick in advertised job vacancies.

In some cases, the revival between April and May was modest. The Society of Motor Manufacturers and Traders (SMMT) reported that new car registrations last month were down by 89% on a year earlier. In normal circumstances that would be regarded as dreadful, but it was better than April’s 97.3% fall (including a 98.7% fall among private buyers). And, given that car showrooms were closed in May, even achieving sales a tenth or so of normal was an achievement. The picture will improve a lot this month.

Economic revival from the April low-point is not rocket science, or even medical science. Lockdowns combined with people’s maximum fears of contact were bound to shut down large areas of activity. Both are easing, though people seem keener to relax for social gatherings and shopping than to return to work, and activity will thus recover.

This is not, of course, just a British phenomenon and, if anything, the UK is a laggard in easing the lockdown. Economists at UBS estimate that, of 42 countries they monitor, the number imposing severe restrictions on mobility has dropped from 33 to 11 over the past five weeks and mobility is up from 38% to 55% of normal. The world is waking up from its coronavirus-induced coma.

What is the biggest risk to the economy’s gradual, if groggy, emergence from this shock? A second wave of the virus as we move into the autumn and winter is the obvious danger. I have written before that, if the justification for the lockdown was to prevent an unprepared NHS being overwhelmed, it would be hard to justify a second lockdown, given that there has been time to add to capacity, including currently unused Nightingale hospitals.

But this is a jumpy, erratic and inconsistent government, driven as much by the polls – as in the case of quarantine policy for overseas arrivals – as by the science, so anything is possible. And a second wave, if it occurred, would see individuals, businesses and sporting bodies take action that would replicate the lockdown in their impact.

The other big danger is that the ending of the job retention scheme for furloughed workers, and its equivalent for the self-employed – now covering a combined 11m people, will be followed by a surge in unemployment. The schemes have done a good, it seems, in preventing much higher unemployment – latest ONS figures for universal credit claims show they are down from very high peaks, including a daily total of nearly 150,000 claims in late March, to near-normal levels.

But two looming cliff-edges, at the end of July, when full government support ends, and at the end of October, when all support stops, underline the danger.
How can an unemployment surge be prevented? The blanket nature of the furlough scheme has made it easy for many individuals to survive the lockdown, and even enjoy it. Most people are not despairing. The latest GfK consumer confidence reading, published on Friday, is at a weak -36, but people are much gloomier about the general economic situation over the next 12 months, where the reading is a very gloomy -57, compared with expectations about their own financial situation, where it is -10.

This suggests, rightly or wrongly, that most people are not worried about their jobs when furlough ends. Interestingly, the Office for Budget Responsibility (OBR), revised down its estimate of the cost of the job retention scheme from £84bn to £60bn on Thursday, based on new evidence that employers using the scheme had concentrated it on lower-paid and part-time workers, thus with a lower cost per worker than had been assumed.

It is these workers, perhaps, who should be worried. The sectors that will be slowest to come back after lockdown, like pubs, restaurants, hotels and travel, including airlines, are likely to need job support beyond the end of October. Selective job support is better than mass redundancy. Boris Johnson has suggested an apprenticeship guarantee for young people, and other schemes are being examined by the government.

The Treasury is working on a stimulus package, partly to show that the significant “levelling up” infrastructure spending Rishi Sunak announced in March remains on track. Other countries are doing so too. Germany has just announced a £115bn stimulus package, including a temporary cut in VAT from 19% to 16% and new incentives to buy electric vehicles.

My own view is that a VAT cut is not particularly needed now, because plenty of pent-up demand will be coming through as lockdown eases. Nurturing this recovery means preserving jobs and providing incentives for battered businesses to invest. There is a lot of talk of a green recovery, which should also be part of the mix. More on this soon.