Economic recovery hinges on when – and if – we find a vaccine
Why is this crisis so hard for economic policymakers? Because it is huge, but also hugely uncertain.
We are used to economic factors causing recessions – weak bank deregulation for the financial crisis or the exchange rate mechanism for Black Wednesday. Both were bad recessions, but their paths were clearer once we’d tackled the underlying economic causes by nationalising banks or leaving the ERM.
But coronavirus, not economics, caused this crisis, so no Treasury decision can make it disappear. Instead, the government, like us, must live with the uncertainties it brings.
If or when a vaccine turns up matters a lot to getting policy right. If it’s soon, the economy will see less fundamental change and the priority will be supporting firms and jobs until normality returns. But if it’s years until a vaccine or treatment, then big economic changes will happen – think of spending shifting from shops near offices to shops near homes. New research says this will contribute to making more than a third of Covid-19induced layoffs permanent, in which case the job of policy will be to ease that transition, not fight it.
Second-wave uncertainty also matters for getting policy right – cutting VAT to encourage people to shop amid a resurgence in infection isn’t a hot idea.
What to do in this minefield of uncertainty? The easy bit: choose policies that work in a wide range of futures. The hard bit: be ready to change course with the evidence.