Predicting the economy by looking at economic statistics has often been compared to steering a car using the rear-view mirror. Tricky enough at the best of times, but in current circumstances it’s as if we’re putting our feet down on both the brakes and the accelerator while peering backwards into dense fog.
So what does a quick glance at the speedometer – today’s GDP figures – tell us? Mostly, they confirm what we already know. The impact of the pandemic and the associated health-related restrictions, both government-mandated and self-imposed, was the steepest and largest fall in output on record, about 20%. As restrictions eased, there was some recovery in June, with growth of about 9%. But the economy is still 17% smaller than it was in February.
These figures have operated as a political and economic Rorschach test. For some, the fact that the UK’s performance appears to be worse than most other developed countries – and almost certainly the worst in the G7 – demonstrates either that we locked down too hard or too slowly.
But it’s too early to jump to such conclusions. Comparing GDP statistics of different countries is difficult enough in normal times, but now – when national statistical offices have, for understandable reasons, been making it up as they go along – it is particularly problematic. How, for example, do you measure the output of schools when teachers are still working and being paid, but the only teaching is online? While it’s reasonably clear that we have performed significantly worse than, say, Germany, we should not conclude that the economic impact here has been uniquely awful.
Others have pointed to the UK’s supposed overdependence on “services”. It’s true services make up four-fifths of the UK economy. But the same is true of France. Nor, overall, was the slump concentrated on service sectors. It’s true enough that some “consumer-facing” sectors – hotels, restaurants, the arts – have suffered disproportionately and been slower to recover. But others, such as financial services, have held up much better. On average, services did no better or worse than the rest of the economy.
But perhaps the worst possible interpretation of these figures comes from those who argue that they demonstrate a trade-off between lives and the economy. Dan Hodges, of the Mail on Sunday, complained: “Those people who have been attacking the government for introducing an insufficiently robust lockdown will now attack the government over the economic impact of lockdown.”
This simply misses the point. As I, and most other economists from across the political spectrum, argued at the very beginning of the lockdown, there is no short-term trade-off between lives and economic growth here. And indeed, today’s figures reinforce this argument. Despite the uncertainties, it is clear the UK has done badly both in human and economic terms.
There are three reasons for this. The first is fairly obvious. The quicker the virus is definitively suppressed, the quicker the government can lift the health-related restrictions it imposed to contain the virus, and the quicker the economic recovery. Those countries that did get it under control, whether by luck or judgment, have clearly benefited.
The second is less obvious. We now have ample evidence that most of the behavioural change – and hence the impacts both on the spread of the virus and on the economy – associated with “lockdowns” comes not directly from government-imposed restrictions, but from individuals and households changing how they live, travel and work in response to the perceived threat of the virus. Again, the quicker and more successful the measures are to contain the pandemic, the quicker the recovery, regardless of what the government does on the economic front.
The third is even more subtle. In the early 2010s, Paul Krugman and others referred derisively to the “confidence fairy”: the idea that public spending cuts would make the private sector more willing to spend, offsetting any negative impacts. This never made much sense. But business and consumer confidence does matter to spending and investment.
In the current circumstances, what drives confidence is competence – in particular, the perceived competence of the government in handling the pandemic. And, sadly, nobody would hold up the UK as a model here. There is plenty of blame to go around, but overall the UK’s performance has been poor, and the public is well aware of that. So the reluctance to return to “normal” patterns of working and spending reflects not just fears of contracting the virus now, but a more general perception that the government’s strategy, from both an economic and health perspective, is at best confused and at worst chaotic.
So, turning our attention to the slippery road ahead, what can we do? The most unusual aspect of this recession is that while output has crashed, unemployment has not soared. That, in turn, is almost entirely due to the government’s furlough scheme, which is now being phased out. I’ve argued the government is right to do that, but it cannot led this lead to mass unemployment, hardship and poverty.
Three main policies are required. First, an increase in universal credit to support the incomes of the unemployed and boost consumer demand; second, help for individuals with retraining grants or to start a business; and finally, direct public-sector job creation. If the government wants to restore its reputation for competence, this is where it needs to start.
• Jonathan Portes is professor of economics and public policy at King’s College London and a former senior civil servant