In April, the UK’s output fell 20 per cent, by far the largest contraction recorded since monthly economic statistics have been collected. This slump came on top of a near 6 per cent fall in March, itself the previous sharpest monthly decrease.
In part, however, the only wonder is that the figures were not worse. That only a quarter of the economy has thus been far lost from a state order to cease economic activity, except that deemed essential or which could be done from home, shows how significant keeping so many furloughed has been to sustaining output and demand.
There are no historical comparisons worth making to comprehend what is happening. No government has so truncated demand or so restricted production. Nor, faced with a deep economic crisis, has any government been able to use public borrowing and the Bank of England’s balance sheet to replace people’s incomes and inject cash into businesses to let them pay wages and suspend tax payments.
Both the scale of the crash and the government’s compensatory response also render historical comparisons about how the recovery might develop unamenable. It has always been the case that some firms do not recover from recessions. But this crisis risks disproportionately destroying businesses, occurring as it has in a monetary environment that left corporate debt extremely high and cash reserves weak, when there was virtually no return on holding revenue as savings.
The commitment to recovery is also conditional. The government’s assumption is that the recovery must be circumscribed by the ongoing health risks. But the food and drink sectors in city centres cannot be resurrected if significant numbers of people continue to work from home. The hospitality and entertainment sectors cannot function if the social distancing rules remain in place. Quite obviously, tourism cannot be revived if people are unable or unwilling to travel.
Right now, no government could have any realistic idea of what the past three months have done to the aggregate psychology of people’s economic behaviour.
There will be no uniform disposition towards rapidly consuming more services. Already it would seem that, for some people, fear has taken such a hold that they will spend more time in their houses. Others have sufficiently enjoyed a more locally based life to ensure that they do not wish to return to their old, mobile habits c including commuting long distances – even assuming that their employer is one who still thinks it worth spending large sums of money in prime commercial rental markets.
The state intervention necessary to have contemplated such an economic shutdown has, for the time being, suspended a seismic drop in employment. But once the state-financed furlough scheme ends in October, another sizeable economic hit is coming in the form of much higher unemployment. In its political consequences, a sharply constrained recovery that sheds potentially several million jobs will go far beyond what we saw in the UK after the 2008 crash.
During the last recession, the UK employment rate never fell below 70 per cent, and for all the ongoing weaknesses in the British economy over the past decade, employment expanded largely continuously after 2012. This time, we cannot necessarily expect a repetition once the economy starts to grow again.
Undoubtedly, there will be new opportunities, including for local economies within cities and for digital businesses. The government has already indicated it wants “shovel-ready” infrastructure projects to drive the recovery. But anything that isn’t literally and metaphorically fixing potholes requires taking decisions around housing, transport and energy that will be vehemently politically contested.
Beyond the UK, there is the matter of China. It was not the Covid-19 crisis that turned the US-China economic relationship into a site of geopolitical competition. But the pandemic has diminished the likelihood of a relative accommodation being reached in the US-China economic war that would, for the immediate future at least, separate trade and technology from Taiwan’s future.
In terms of great power rivalry in the modern world, there is nothing that looks like what is now in play between the US and China. For European countries that are simultaneously members of a military alliance led from Washington, and economically dependent on both the US and China, there are only punishing choices ahead.
Boris Johnson’s commitment of a right to live and work in the UK to nearly three million Hong Kong citizens who are eligible for a British National (Overseas) passport necessitates that the government has already chosen a side. Consequently, more rapid British economic decoupling from China will ensue than elsewhere in Europe.
There is a paradox around the general Western faith in the idea of progress. That our lives could be so disrupted by a pandemic is a painful lesson that over recent centuries we have only moved the balance between human beings and nature over disease in our favour, not won a definitive victory separating our experience of the human condition from that of our ancestors. But in the same moment, we have also put great faith in the idea that central banks have such powerful monetary tools at their disposal that we can take economic risks that governments would quite probably have thought unimaginable even two decades ago.
The harsh reality is that economic recovery will depend on accepting, at least until there is a vaccine, that Covid-19 is endemic and recognising that there necessarily are limits to what central banks can fix.
This article appears in the 17 Jun 2020 issue of the New Statesman, The History Wars