The Bank of England’s new outlook for the UK economy does not make for pretty reading. National income, it estimates, will shrink by a quarter in the three months to June, and 14 per cent across 2020 as a whole.
This is a deeper recession than has been experienced for 300 years, since the South Sea Bubble of 1706. The financial crash of 2008 pales into insignificance by comparison.
It means that the government is going to have to do much more to repair the economic damage than it has yet acknowledged.
As yet it is still trying to work out when and how economic activity can start up again as the coronavirus outbreak persists. Major sectors are being asked to identify what production activities are possible with continuing social distancing measures. Can a factory or construction site operate with workers physically separated? How can shops keep customers apart? The Trades Union Congress rightly demands that no business reopen without a health and safety assessment and agreement with its staff.
No decisions have yet been made on such reopenings. But anxiety about generating a second wave of the pandemic will make the process slow and careful. That makes forecasting the depth of the recession, and the timing of recovery, particularly difficult.
The Bank of England insists that its projections are merely a “plausible illustrative economic scenario,” and it carefully sets out the assumptions on which they are based. But many economists will be doubtful about how plausible this is. The concern is not that the bank has overestimated the huge fall in GDP. It is that its projections for the recovery are too optimistic.
The bank’s projections suggest that as the economy reopens output will rapidly rise, and will recover to its pre-crisis level by the middle of next year. In the alphabet used to describe the path of recessions, this one will be “V-shaped”.
But this rests on some optimistic assumptions. The bank assumes that social distancing measures will be completely lifted by the end of September. But the government’s own chief medical officer, Professor Chris Whitty, has warned that they are likely to remain in place at least till the end of the year.
Even more significantly, the bank has assumed only a minor “scarring effect” of job loss and business bankruptcy. Yet its own projections show unemployment rising to around 9 per cent of the workforce, more than three million people. We also know that – despite the government’s measures to help them keep afloat – many businesses are already going under.
In those circumstances it is extremely unlikely that production will “bounce back” immediately to its previous levels. Everything we know points to a slow and painful recovery: fewer businesses taking on new workers; consumers unsure about spending; entertainment and tourism still restricted for months ahead; industry uncertain of future demand and so reluctant to invest. Remember that after the recession generated by the 2008 financial crash it took more than six years for GDP per head to return to pre-crisis levels.
Other scenarios project a much longer and deeper recession. The Resolution Foundation estimates that unemployment could hit almost five million (14 per cent) if lockdown measures last six months rather than three, with recovery to pre-crisis levels not till 2022. The recession in this case would be shaped more like a U.
Either way, these projections make it inevitable that that we will need another fiscal stimulus package when the lockdown is lifted. With mass unemployment and private demand still weak, government spending and investment will be required to kickstart the economy back to life.
We have become used to thinking that austerity was the response to the financial crash. But that came later. At the beginning, in 2008-2009, all the leading industrialised countries implemented huge fiscal stimulus packages. Under Gordon Brown, the UK’s included £25bn of new spending and tax cuts, equivalent to over 1 per cent of GDP.
Today the government has already committed at least £60bn in rescue spending, mainly on its business rates relief and job retention schemes. But these measures aren’t a “stimulus” in the economic sense. They are simply the provision of liquidity (cash) to keep businesses afloat and workers in jobs with incomes. Stimulus measures are about getting people back to work and restoring economic activity.
How should a new fiscal stimulus be spent? Two criteria should be paramount. Spending should be focused on those who have been made unemployed, in sectors that can absorb new staff most quickly. And it should be directed to where it can do most social and environmental good. We should ensure that the recovery is green, equitable and resilient.
Obvious priorities therefore include health and social care, digital infrastructure, the arts and culture and addressing the climate and environmental emergency. Construction workers could be employed in a new drive to insulate homes and buildings and install renewable heat systems. Others could build electric vehicle charging networks in towns and cities.
There are big opportunities to invest in nature conservation, tree planting and more sustainable land management, and in flood defences. The Arts Council could provide grants to all the venues and performers who have lost their livelihoods during the lockdown. The government should procure the expansion of superfast broadband around the country it has for so long promised. Training people in the skills needed in these areas will itself be a source of employment.
All this will cost money, of course. And you can hear the voices saying that it will be too expensive. The argument that we shall need more austerity to pay for the crisis is already being made. But it’s economically wrong. Ultra-low interest rates make debt repayments clearly affordable.
Austerity, as we discovered last time, retards the income growth which in the end is what brings governments deficits down and pays for higher borrowing. In the meantime the Bank of England, as many economists are pointing out, can take up the slack.
In this unfolding crisis it looks likely that we have reached the peak of hospital deaths. But the unfortunate truth is that we have barely started to respond to the economic disaster. It’s time to start planning the next phase.
Michael Jacobs is a professorial fellow at the Sheffield Political Economy Research Institute. He is a former advisor to Gordon Brown
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