Charlotte Street Partners



An economic drought

Written by Alex Massie
13 August 2020

So here it is: the United Kingdom is now, officially, in a recession. This can hardly be considered a surprising development but the scale of the slump remains shocking. According to the Office for National Statistics, GDP shrank by 20.4% in the second quarter of 2020. This followed a 2.2% decline in the first quarter. Suddenly, even the great convulsions of 2008 seem insubstantial compared to this, genuinely unprecedented, situation. 

If the 2008 financial crisis was a tornado, the Covid recession has been more akin to a prolonged drought. The economic taps have been shut off but even if the supply of economic activity had not been so summarily curtailed, a lack of demand would have shoved the UK, and other countries, into recession anyway. Indeed, even before the coronavirus landed the UK was on the brink of recession; growth was almost non-existent in the latter stages of 2019. 

Even so, the scale of this slump really is extraordinary. As Ed Conway, Sky’s economics editor, observed on Wednesday morning: it is already the deepest recession in UK history, the deepest afflicting any of the G7 economies this year, and the steepest recession “since the invention of Gross Domestic Product”. If that doesn’t make you swallow hard and blink then, well, it should. 

In such circumstances, speculating about whether a recovery will be V-shaped or U-shaped or W-shaped seems a surprisingly optimistic take on events. It assumes, after all, that there will be some kind of swift recovery; that, following the drought, the economic rains will return, and the desert will bloom once again. 

Eventually, I suppose, it might – but not for some time yet. This is one of the curious features of this present crisis: it is less than six months since large parts of the economy were shuttered, the better to build a dyke to protect society from the virus. Since then, time has given the impression of slowing down, dragging to the extent that the pre-Covid days somehow feel as though they belong to a long-distant age. 

Which is another way of noting, disagreeably, that we are only at the end of the beginning of this emergency and the end of the end is a long, long, way distant. According to the ONS, 220,000 jobs were lost between March and June but, while bad, this is, as everyone understands, only the start. The number of people on payrolls actually fell by almost 750,000. Meanwhile, the furlough scheme and other Treasury initiatives continue to support the notional employment of some 7.5 million people. Many – though we do not know how many – of these jobs only exist on a notional basis; they will melt away as and when the furlough scheme is wound up in October. 

Since the economic crisis is intimately connected to the public health crisis, we may observe this inconvenient reality: the first wave of the virus has, at great cost, largely been suppressed but, as everyone now recognises, in the absence of a vaccine we must adjust everyday life to live with a virus that cannot be eradicated completely. The potential for future outbreaks is ever-present and each of these would, if left unchecked, risk a fresh national epidemic. In such circumstances, the economy cannot fully reopen; nor can we return to ‘normal’ levels of social interaction. 

So, we have a general idea of what is coming and a gathering appreciation of when the storm will make landfall. But the full scale of its impact is, frankly, impossible to measure. What we may say, though, is that Brexit – whatever your views of its costs or opportunities – now looks like a minor, local, difficulty; a pothole on the road at a time when the road itself is at risk of being washed away. 

There is this paradox too: the pandemic has both reinvigorated government and displayed its limitations. Mountains can – and have – been moved to alleviate the immediate damage, yet that damage cannot be avoided forever. Government is not just unavoidable, it is essential. There are not many minimalists or non-interventionists now. Yet in parallel to this, it is evident that government is also in the business of mitigation, not cure. Most of the economic measures introduced thus far offer palliative care. Much better than nothing, but not a road to recovery either. 

And so there is this conundrum. In the immediate future, I suspect voters will demand more, and specifically more protection, from their governments. The state is a shield and its powers must be used to protect the populace. At the same time, if economic recovery is to be sustainable – and based on something larger and more durable than a surge in consumer spending occasioned by the release of pent-up demand – it may well require more, not less, flexibility. If new thinking, or new ways of organisation, are key to recovery then business will need room to experiment. 

Here, as always, there are multiple, inter-connected, trade-offs. Matching the need to offer workers the protection – psychological as well as economic – they will demand without also making it harder for the most productive parts of the economy to flourish will not be easy. Viewed on a longer timescale, this was going to be a challenge anyway. The rise of Asian economies, to say nothing of machine-learning, meant a great adjustment loomed in any event. This crisis has accelerated these moments of reckoning; it has not created them out of fresh cloth. 

As a political matter, it seems reasonable to question whether our elected leaders are up to the task of confronting these challenges. Scotland has hitherto been shielded from some of these questions, if only because the Scottish parliament is largely a spending authority, not one tasked with raising its own revenue or confronting macro-economic questions. But it is not, I think, possible to look at the UK government and feel confident in its ability to handle these matters either. 

Governments will be tempted to pick winners, selecting which sectors of the economy will be protected on preferential terms. However understandable this temptation may be, it risks handing unearned advantages to those sectors already closest to ministers. That in turn creates space for any amount of special pleading and, by doing so, creates incentives to avoid, rather than make, the difficult choices that lie ahead. Above all, perhaps, it will not help answer a fundamental question: where will future economic growth come from, and which sectors of the economy are best placed to deliver productive growth? 

The wisdom of that old Irish joke about not starting from here if that’s where you wish to go has once again been confirmed. This, though, is still the phoney war phase of this emergency. The first, immediate, battle has been fought at great cost – in lives and treasure – but it, I am afraid, has been the easy bit.

About Beyond the Street and Alex Massie

We are all guilty of being too inwardly focused sometimes, especially as we navigate these changed times. It is all too easy to be caught up in the problems close to home, and for overarching trends to pass us by.

To remedy that short-sightedness, Charlotte Street Partners has enlisted the ingenuity and talent of the writer and commentator Alex Massie. As our new correspondent at large, Alex will look at the bigger picture. We have challenged him to come up with something a bit different: broad, lateral thinking, thematic insights and a more global perspective.

Alex is a freelance journalist and commentator based in Edinburgh. Not only is he Scotland editor of The Spectator, but he also writes a political column for The Times and The Sunday Times. He features regularly on the BBC as a political commentator and has written in the past for The Telegraph, Politico, The Washington Post, the Los Angeles Times, The New York Times, the New Statesman, The Observer, and TIME magazine, among others. He was also the Washington correspondent for The Scotsman and assistant editor of Scotland on Sunday. 

We hope you enjoy his work – and do feel free to forward this email on to colleagues and friends you think might be interested. They can subscribe to Beyond the Street and our other regular briefings here

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