Covid-19 has hit the global economy hard and fast. The global economic collapse is already deeper than in the Great Recession and early indications are that the damage is happening at least 20 times faster and will be several times larger than it was in 2008 and 2009.
In 2008 Mervyn King, then the governor of the Bank of England, argued that what was happening in the US was broadly irrelevant to the UK, as the two countries had “decoupled”. He was wrong. What began in the Florida housing market spread around the world, just as it did in 1929. What happens in the US economy impacts the rest of the world, usually quickly.
This will be true of the current crisis, and the early evidence of what is happening in the US economy is of a disaster of startling proportions.
Governments around the world have responded quickly and well. In the UK, the government moved sensibly and fast to boost the economy. The measures announced by the Chancellor were especially impressive. The idea of getting money to people and paying the salaries of workers laid off as firms were forced to shutter is totally sensible. Help for the self-employed took a while to be announced but was equally well judged. Unlike in 2008, the Bank of England stepped in early with emergency meetings, cutting rates to levels not seen before. In the Great Recession rates only went to 0.5 per cent; they are now 0.1 per cent. The monetary policy committee (MPC) increased asset purchases both in the amount they would purchase, and what they would purchase, and are now providing unprecedented liquidity to help to get the economy moving again. All good. But it probably won’t be enough, and negative interest rates are going to have to be considered.
The Federal Reserve, the US central bank, also responded just as the MPC did by cutting rates to zero, buying assets and increasing liquidity. Congress passed a $2trn stimulus package. But this has already been shown to be inadequate; the $349bn fund the Small Business Administration was given to help small businesses ran out of money on 15 April, after just two weeks.
On that day, my son and his wife got their stimulus checks from the IRS, but many didn’t. The IRS website couldn’t deal with the millions trying to register and crashed, sending out stark messages: “payment status not available”. Millions of people will have to wait many months. Treasury secretary Steven Mnuchin has claimed that the $1,000 payments should last for ten weeks, which of course they won’t; nobody is hiring bartenders. Already there is evidence that people are using the money to buy food; food banks in Georgia and Texas have reported being overwhelmed by thousands of families arriving in their cars. Calls to reopen the country are driven by the fact that millions have no income. The government has paid out billions in airline money, but what is needed is helicopter money, and fast, for ordinary people who can’t buy food.
There is now a range of opinions on what is coming in terms of the depth of the recession and the duration and shape of any recovery. The extent to which the opinions differ is a function of the duration of the lockdown. The gloomy scenario suggested by the Office of Budget Responsibility suggested that a three-month lockdown will result in UK GDP dropping 35 per cent in the second quarter of 2020 and a rise in the unemployment rate to 10 per cent, but it also assumes no lasting economic hit. The unemployment rate, it argues, will decline more slowly than GDP recovers. The National Institute of Economic and Social Research, in its monthly tracker, is forecasting a 5 per cent decline in growth in the UK for the first quarter of this year, followed by a drop of around 15 to 25 per cent in the second quarter if the lockdown continues.
The IMF, in its World Economic Outlook published earlier this week, forecast the UK’s growth would go from a 1.4 per cent rise in 2019 to a 6.5 per cent fall in 2020, and that that would be followed by only partial recovery, with a 4 per cent rise in 2021. It predicts a similar pattern for the US. In the UK, unemployment is forecast to rise to 4.8 per cent in 2020 and 4.4 per cent in 2021, while the US is forecast to endure higher unemployment at 10.4 per cent this year and 9.1 per cent next year. But – just as the IMF’s forecasts in 2008 were shown to be composed of wishful thinking – even these figures look wildly optimistic.
Things look a lot worse in the United States than that already. The Great Recession caused unemployment in the US to climb to a peak of 10 per cent in October 2009, but this took almost two years. In February 2020 the US unemployment rate was 3.5 per cent; by mid-March it had jumped to 4.4 per cent. This hadn’t been expected, because a good indicator of what is going to happen to unemployment comes from state unemployment insurance claims, which rose from 211,000 in the first week of March to 282,000 in the second. But then the storm really hit. Over the following four weeks 22 million people registered as unemployed. That suggests an unemployment rate for April around 20 per cent. It will climb even higher in the months to come.
It is harder to work out what is happening in the UK labour market, as we lack timely data; all we have is that for January, which isn’t much help. The evidence from rapidly rising claims for Universal Credit, as well as recent evidence from a survey run by the ONS from March 23 to April 5th, suggest that a quarter of all businesses have temporarily closed. An early bounce-back in the UK looks optimistic, especially with the US entering a period in which unemployment rates are higher than they were in 1933. I assume behaviour is going to change, but what do I know — cruise bookings for 2021 are up, apparently. Tough days are ahead; we need a miracle.