As a consequence, deeper forms of depression economics are beginning to emerge. People are not spending even what they have got, but rather saving it if for no other reason that the usual channels of spending – shops, bars, restaurants, travel, holidays – no longer exist. In such circumstances, both fiscal and monetary policy become powerless to support demand.
In any case, it would be wrong to regard the Government’s various economic support initiatives as “fiscal stimulus” as such. At best, they merely substitute for the economic activity that has been repressed by social distancing. But even if the Government went further, with much bigger tax cuts and spending increases, it’s not clear it would have a great deal of effect as long as the lockdown persists. Supply and demand are chasing each other down into economic oblivion.
After a grim week in which the death toll climbed alarmingly, I nevertheless detect one or two glimmers of hope. Disrespectful of the fatalities, equity markets have been climbing out of the doldrums, and Government bond yields have risen markedly from the full on depression they were signalling a month ago. These more positive signs have coincided with news from the front line of the pandemic, with nations that were early adopters of lockdown beginning to lift the restrictions. The symbolism of barriers being removed from around Wuhan, where the outbreak began, could not have been greater; there does indeed seem to be light at the end of the tunnel.
Now it could be that this is no more than a false dawn. With no vaccine or reliable antiviral drug in sight, high infection and fatality rates could quite quickly re-establish themselves, regardless of more effective testing and tracing. Any consequent rolling series of lockdowns would be poison to the economy, destroying all remaining hope of a rapid bounce back.
So that’s one potential future. But the more positive way of looking at developments is that, like the Prime Minister, we are indeed already through the worst, and that with the unproductive deadwood of the economy removed by the extreme nature of the lockdown shock, we’ll eventually see a surge in activity, productivity, and indeed inflation as the restrictions are removed and pent up demand comes roaring back.