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14 July 2020updated 21 Jul 2020 2:19pm

The UK could still have a V-shaped recovery, but there are three major obstacles to overcome

These known hurdles could prevent a swift economic recovery from the coronavirus recession.

By Stephen Bush

Good news! The United Kingdom’s economy grew by 1.8 per cent in May, one of the best monthly growth figures in British history. Bad news! The growth pales in comparison to the contraction over the last three months.

At present rates, the most optimistic account for the British economy would see overall economic performance having recovered to its pre-coronavirus size by the end of the first quarter of 2021, but with significantly higher unemployment due to the inevitable consequences of social distancing on leisure industries such as tourism, restaurants, pubs and clubs. This would still cause considerable human damage, but thankfully, nothing that the right social policy choices couldn’t fix.

I still think this is possible. The absence of stories about a second spike of infections in the community – the only major outbreaks since the United Kingdom unlocked have emanated from unsafe workplaces – and the British government getting to grips with the development of test-and-trace would both result in the resumption of normal economic activity by households. There’s no reason to think that the United Kingdom couldn’t be experiencing much higher monthly growth by September if both those conditions are met.

But there are three avoidable obstacles in the way of that optimistic scenario. (There are other events outside the government’s control, such as a discovery that the long-term prognosis for people who have had it is far worse than we currently believe, that would hit the economy, but I am confining myself to things the government can control.)

The first is, of course, a second uncontrolled spike in cases of the novel coronavirus, which, in addition to the direct human cost would further hit demand, as it would trigger a second lockdown, whether instigated by the government or simply “from below”.

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I use the word “uncontrolled” here deliberately – spikes in infections are outside the government’s control, but the ability to test, trace and isolate new cases of the novel coronavirus is not.

At the risk of sounding like a stuck record, the central cause of our present economic difficulties are the rational measures that households are taking to avoid infection, many of them before the government ordered them, and many of them going further than the lockdown law ever went in any case. A second spike in infections would play out the same way, and even the fear of one hits demand.

The government’s biggest bit of fiscal stimulus couldn’t be found in any of the measures Rishi Sunak unveiled last week: it is the money the British government is spending on a system to test and trace new infections of the novel coronavirus, and to research new palliative treatments and vaccines. The government needs to do something that we usually associate with oppositions, and visibly demonstrate its competence – this is a two-part challenge. 

Firstly, the United Kingdom’s test and trace system does actually have to be up to scratch, to prevent an uncontrolled second outbreak, and secondly, it has to be seen to be up to scratch, so that consumers don’t fear a second outbreak. The first part of that challenge involves the government getting a grip on the operational challenges of delivering test and trace, and second would run through making Sunak, its most trusted and liked minister, the face in charge of the overall response. For a variety of reasons, he is more trusted than the Prime Minister or the Health Secretary and so positive news about the UK’s test and trace system will be believed by more people if it comes from the Chancellor. (There’s also an argument that the man who controls the purse strings for these schemes ought to in any case to be the one overseeing their effectiveness.)

The second is the shift of at least some of the nine million workers who are currently on the furlough scheme to Universal Credit when they become unemployed. For the average furloughed household, that means a decline in their household income from 80 per cent of their pre-pandemic salary to just 60 per cent. That will cause a further hit to demand, which will potentially cause growth to stall, deepening and extending the coronavirus recession.  Fortunately, there’s an easy solution here, which is to increase the generosity and eligibility of Universal Credit. (This would also boost the economy by decreasing the motivation of individual households to save in a depressed economy.)

And the third obstacle to the United Kingdom completing a V-shaped recovery in the first quarter of 2021 is having a disruptive Brexit that increases paperwork and costs on British businesses. The UK government has eschewed the option that would have allowed it to secure the drastic Brexit it craved without running this risk – requesting an extension to the transition period – but it could still swerve this obstacle by signing up to a softer Brexit than planned.