How quickly might the UK economy recover from the Covid shock, and what will it look like the other side of the pandemic? The honest answer to these questions would be to say that nobody knows. Don’t believe those who claim they do; if their predictions are proved right, it will be as much luck as judgment.
It is nonetheless the Bank of England’s painful duty to at least try. In normal times, its forecasts are generally quite good, but when the going gets tough, it tends to struggle along with the rest of us. Repeated predictions of a relatively swift rebound after the financial crisis proved horribly wide of the mark. It took six years for the UK economy to get back to where it was prior to the banking collapse. Living standards suffered an even longer hiatus.
It shouldn’t therefore surprise that this time around the Bank should pepper its forecasts with multiple qualifications. The Bank’s central, most probable, scenario is for a smaller peak to trough collapse in the economy than envisaged three months ago, but then for a rather slower rebound, with the economy not returning to where it was until the end of next year.
Yet the perhaps more striking element of the Bank’s prognosis is the sheer range of other possible outcomes it is prepared to countenance – much wider than it has ever forecast before.
In the most optimistic scenario, economic output has almost fully recovered by the end of this year, with growth returned to trend thereafter. In the most pessimistic, the present V-shaped recovery peters out quickly and GDP remains considerably below pre-pandemic levels for at least the next three years.
In writing about the economic impact of lockdown, I’ve tended to waiver between these two extremes, covering off all the bases as I go. Wherever we end up, I’ll be able to point to a column which said as much. This is cheating, of course, but it is common enough in punditry, even if rarely admitted to.
Yet it also reflects the same extraordinary level of uncertainty that Andrew Bailey, Governor of the Bank of England highlights in his latest Monetary Policy Committee Report. There is no way of knowing; so much depends on the progression of the disease, the political reaction to it, and the long term behavioural changes that lockdown has inflicted.
Chief among these structural shifts are the turbo-charged switch from physical to online retailing and from office to home working. It is far from obvious how the economy might adapt to accommodate them.
Today, however, I’m going to make the more optimistic case. This is admittedly not an easy thing amid the now daily torrent of job loss announcements, the renewed bout of local lockdowns, and a hyper-cautious, panicked Government that reimposes quarantine at the drop of a hat and warns that it may still not be possible to reopen schools in September.
A recent survey by Morgan Stanley, moreover, found that Britons are the slowest and most reluctant in Europe to return to the office as restrictions are lifted. Employees should be careful what they wish for; if a job previously based in central London can be done out of Surrey, it can just as easily be done in low cost Mumbai.
Others are thoroughly enjoying their six months of paid, furloughed leave. That’s not good either. They are in for a rude awakening when the scheme comes to an end and they find they are out of a job.
But it sometimes pays to go against the flow, and all my contrarian instincts tell me not just that the Covid hysteria will be largely behind us by early next year, but that the economic rebound may also be somewhat faster than generally assumed.
Start with the old truism that just as in a boom things are never quite as good as they seem, nor are they ever quite as bad as they look in the depths of a crisis. Covid is driving some big structural changes in the economy, but I wonder if they’ll be quite as transformational as made out.
The idea, for instance, that we’ll permanently give up much social spending and instead choose to stay at home with a bottle of wine and a Netflix subscription strikes me as deeply unlikely. Once the pandemic fizzles out, much of this activity will resume.
I’m equally sceptical about the death of the office. Those firms planning substantially to reduce their office space will soon find that home working and Zoom alone are poor substitutes for a lively workplace. A business populated by colleagues who have never physically met is unlikely to function well. Similar predictions were made about the outlook for office space during the financial crisis, and for tower blocks after 9/11. It didn’t last.
Human beings are social animals. They go to the office as much for the camaraderie, the recreation, and the social contact of city life as to earn a living. The same goes for mass, overseas tourism. This will resume as soon as it is allowed.
Obviously, some part of the imposed behavioural changes we have seen in lockdown will stick; many businesses won’t survive the upheaval. But as confidence returns, others will fast take their place.
Unlike 2008, there is no problem with the banks, or their ability to lend to the economy. Equity markets are equally happy to refinance essentially sound companies. Unemployment will undoubtedly rise as furlough ends, but probably not by nearly as much as some of the scarier predictions would have you believe.
Many of those who lose their jobs will choose to become economically inactive, and quite a lot of our migrant workers will return home. Both the UK labour market and the economy are far more flexible than we give it credit for.
Savings have soared during the pandemic, indicating a high degree of pent up demand. This money will come flooding back into the economy once the outlook is more certain.
For now, it is the contrary, pessimistic case that tends to dominate the wider, media conversation. The data, both on the disease – which adjusted for more extensive testing, focused as it is on hotspots, points to a flat or even declining infection rate – and the economy – which indicates a continued, sharp, real time pickup in activity – suggests otherwise.