In the decade since the 2008 financial crash, the world has endured one of the slowest economic recoveries in history. An unforeseen international crisis – or a “black swan” event, such as the new coronavirus outbreak –has long had the potential to trigger a recession.
Sceptical economists and scientists have repeatedly warned of the threat posed by epidemics in a fragile, interconnected, globalised world of mass travel and intricate supply chains. The Covid-19 disease has now affected 115 countries and territories, resulting in more than 4,000 deaths. Mass quarantining, the cancellation of public events – potentially including this summer’s Tokyo Olympics – and a collapse in tourism and trade will all depress output.
At the time of the Sars crisis in 2002-03, China, where Covid-19 originated, accounted for only 4 per cent of global GDP; it now accounts for 16 per cent. Coronavirus has exposed the West’s tacit reliance on China as the world’s buyer of last resort. Not since 1976, the year of Mao Zedong’s death and the end of the Cultural Revolution, has China suffered an economic contraction.
After years of anaemic growth, Western economies are ill-prepared for a new global recession. Monetary policy, one of the traditional tools to stimulate growth, is already ultra-loose in most countries. In the United Kingdom, the Bank of England’s base rate stands at a record low of 0.25 per cent (reduced from 0.75 per cent), while the eurozone’s equivalent rate is -0.5 per cent. When economic confidence is low, and consumers are determined to hoard cash rather than spending or investing it (a phenomenon JM Keynes described as a “liquidity trap”), interest rate cuts, such as the US Federal Reserve’s recent 0.5 percentage point reduction, have little effect.
For this reason, fiscal stimulus – through public spending increases and tax cuts – is the most crucial economic remedy. Unlike some eurozone economies, the UK can afford to borrow significantly without fear of a surge in bond yields. It retains an independent central bank – able to intervene in times of crisis – and an average debt maturity of 15 years, the longest of any G7 economy. On 10 March, as investors sought safe havens, UK bond yields fell to their lowest level since records began in 1703, making it ever cheaper for the government to borrow money.
The Conservatives have already signalled they intend to take advantage of this room for manoeuvre, discarding past promises of an annual budget surplus and announcing a 4 per cent rise in public spending (the largest increase for 15 years).
After a decade of austerity, greater spending on public services, the National Health Service most of all, is essential. Though the NHS was formally protected from cuts, spending has risen by an average of just 1.5 per cent a year over the past decade, compared to an average of 3.7 per cent a year since its formation in 1948.
The consequences of such underfunding are being felt by all. A recent poll by the Doctors’ Association UK found that only eight out of 1,618 NHS medics believe that the health service is “well prepared” for the coronavirus crisis. While Germany has eight hospital beds for every 1,000 people, the UK has just 2.7, with 17,000 NHS England beds cut since 2010.
The value of the welfare state as a form of collective insurance is never more obvious than during epidemics, from which no individual, however wealthy, can insulate themselves. The distinction between domestic and foreign policy has largely collapsed: global problems, such as pandemics, antimicrobial resistance, climate change, refugee flows and social media panics, necessitate multilateral solutions. Individuals may self-isolate but the world’s nations must not.
In 1923, Keynes observed that: “Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.” The same is true of the world today. Rather than merely resisting coronavirus and economic recession, we must prepare for the crises to come.
This article appears in the 11 Mar 2020 issue of the New Statesman, How the world is closing down