Records are there to be broken, so it would be unwise to claim that there will never be a worse performance by the US or eurozone economies than was seen in the spring of 2020. It would, though, take something truly spectacular: a nuclear war, a meteor strike, a pan-continental climate catastrophe or a more severe pandemic than Covid-19.
It is worth reflecting for a moment on just how dire the recent economic news has been. The UK is a bit behind the US and the eurozone and does not report its second-quarter growth figures until 12 August but it is already known that the economy contracted by about 25% in only two months – March and April. Even with a pick-up in activity in May and June, activity was probably still about 15% below its pre-crisis level at the start of the third quarter.
It is a similar story elsewhere. Fifteen years of growth in the eurozone were wiped out in a single three-month period, while it was considered modestly good news last week when the second-quarter falls in gross domestic product in the US and Germany were limited to “just” 9.5% and 10.1% respectively. To put those better-than-expected figures into perspective, they were comfortably worse than anything seen in the early 1930s, when a quarter of Americans were unemployed and the Weimar Republic was on its last legs.
There are those who remain cheerful despite all the gloom – and they fall into three groups. The first category comprises those who say there is no link between an ever-expanding economy and wellbeing, and that it is time to de-fetishise growth. There has been an abundance of studies that have charted levels of happiness while GDP has been expanding but now there will be a plethora of data to show whether a smaller economy, lower personal incomes and greater amounts of leisure time (some of it involuntary) will result in more contented, stable societies.
Then there is the group who say the coronavirus has changed everything and that the world will never be the same again. This is, of course, what was said during the global financial crisis of 2008-09 but there is more substance to the claim this time. It is not just that the role of the state has expanded, although that is part of the story. It is also that the whole small state, sound money, globalisation model has been called into question by the pandemic.
Governments, even rightwing governments, have been forced into wartime-like levels of intervention: subsidising wages, providing 100% loan guarantees for businesses, nationalising or taking stakes in key sectors of the economy. To take one example, modern monetary theory – which broadly says that countries that have their own currency can print as much money to cover state spending until inflation starts to get out of hand – has had its devotees for many years but was always treated with disdain by central banks and finance ministries. Now the issue is not so much whether policymakers take MMT seriously but whether they are doing a version of it on the quiet.
All that said, there have been only two seminal shifts in political economy in the past century – in the mid-1940s and in the mid-1970s – and both were long-drawn-out, painful affairs. Inertia in the system means there is no guarantee that the challenge to the status quo will succeed.
Whether it does or not probably depends on whether the third category of cheery optimists are right. This group, wellrepresented in the financial markets, thinks the second-quarter growth figures are of little importance because they were the result of a one-off response to a health emergency that is now over. There was a deep recession when economies were put in full lockdown but recovery began as soon as the restrictions were eased and has been gathering pace ever since. Share prices have recovered a lot of the ground they lost in February and March because many in the City and on Wall Street are convinced that money creation by central banks and higher government spending by finance ministries will result in a V-shaped recovery.
As with the growth-doesn’t-make-you-happy thesis, this notion will be put to the test in the coming months. In the UK, there have been some signals – from retail sales, for example – that the economy is gaining momentum.
These, though, are massively outweighed by factors pointing to a much slower recovery, or even a double-dip recession. For a start, large chunks of the economy – including much of Britain’s night-time economy – remain closed.
Then there is the chaotic handling of the economy by the government, with the prime minister announcing an easing of restrictions one day and reimposing some the next. The chances of catching Covid-19 or dying from the virus are much lower than they were in March or April but you would never know it by the flip-flopping going on in Whitehall. The impression given by ministers is that it will take a very long time for the economy to return to normal, making such an outcome more likely.
It is also unfortunate that the Treasury has chosen this moment – when quarantine restrictions have been imposed on travellers returning from Spain, face masks are being made mandatory for a wider range of activities and restrictions have been tightened across much of the north of England – to start winding down its furlough scheme.
Having made a mess of the health emergency when Covid-19 first surfaced, the government is now making a complete Horlicks of the economic crisis. Who knows, more chaos now could eventually lead to a happier, friendlier Britain later but one thing’s for sure: there will be much misery first.