The weakest global economic recovery in history has also been one of the longest. Growth may have been mediocre since the 2008 financial crisis but it has, at least, been consistent. Coronavirus, however, threatens to change this.
Growth forecasts have been slashed as stock markets endure their largest falls since the crash; major economies, including the UK, stand on the edge of recession. The FTSE 100 has fallen 20 per cent since mid-February, trading at levels last seen after the Brexit vote.
Even before the coronavirus, the UK economy was fragile. GDP failed to grow in the final quarter of last year and annual growth was just 1.4 per cent. Though the financial sector is better regulated than in 2008, the UK is, in most respects, worse prepared than last time.
Large interest rate cuts, one of the traditional defences against recession, are no longer possible. The Bank of England’s base rate stands at just 0.75 per cent, compared to 5 per cent in 2008, and it has already enacted £435bn of quantitative easing (electronically created money used to purchase government bonds and other assets). A decade of austerity and anaemic wage growth (average earnings only recently returned to their 2008 peak), meanwhile, has left households with few reserves to fall back on.
To prevent or limit a recession, the UK will have to deploy the traditional Keynesian weapons of higher public spending and tax cuts. Unlike some Eurozone economies, Britain can afford to borrow significantly more without fear of a surge in bond yields. It retains an independent central bank – able to act as a lender of last resort – and an average debt maturity of 15 years, the longest of any G7 economy.
The Conservatives have already signalled their intention to take advantage of this room for manoeuvre, discarding past promises of a budget surplus and announcing a 4 per cent rise in public spending (the largest increase for 15 years). New Chancellor Rishi Sunak has hinted at his willingness to abandon the fiscal rules announced by his predecessor Sajid Javid, which commit the government to balancing the current budget in three years and to keeping capital spending below 3 per cent of GDP.
Even George Osborne, the original author of austerity, has suggested that the fiscal rules “[don’t] really apply right now” and has proposed ideas including direct cash grants for the self-employed. But the damage done to the economy’s long-term growth potential by spending cuts (a phenomenon economists describe as “hysteresis”) endures. And fiscal conservatives will warn that the size of the national debt (79.6 per cent of GDP, compared to 35.2 per cent in 2007) means Britain’s room for manoeuvre is limited.
Finally, the spectre of a no-deal Brexit in December, when the UK is due to leave the European single market and customs union, threatens to further chill investment. Though the government has insisted that it will not request an extension to the transition period, it will be urged to use coronavirus as cover to do so. There has never been a good moment for the UK to sever economic relations with its largest trading partner – but a new epidemic could prove a particularly inopportune time.