Forget the doom mongers, we can recover quickly
THE United States appears to be staring into the abyss of anarchy. As huge protests continue over police brutality, cities are ablaze, racial divisions widening, and authorities paralysed.
Yet amid all this social turmoil comes remarkable economic news. Contrary to all expectations, the latest US labour market figures have shown a dramatic improvement. Despite the pandemic, the unemployment rate there fell last month to 13.3 per cent, down from 14.7 per cent in April. As the economy began to reopen, 2.5 million new jobs were created.
A recovery is undoubtedly under way in North America. Could the same happen here? Throughout the emergency, we have been warned that Britain faces the worst slump for three centuries, driven by soaring unemployment, business failures and battered public finances.
Yet, following the US example, perhaps the apocalyptic gloom has been overdone, partly because the circumstances of the present downturn are unique in our history.
It is nothing like the usual type of recession, brought about by external factors such as a financial crash, rampant inflation or a run on sterling.
ON THE contrary, it has been imposed by the Government to avert a public health calamity. In effect, our economy was put into a medically induced coma. On resuscitation, therefore, the patient may quickly return to health. As economist Julian Jessop put it recently, once the lockdown is fully eased “we may be pleasantly surprised at how quickly activity returns to something like normal”.
Already there are signs of green shoots, from increased traffic on the roads to lengthy queues at fast-food outlets. Only last week, a report from Oxford Economics said that “Covid-19’s impact should be a short, if painfully sharp, shock, with much of the damage being quickly repaired as output rises by 7.8 per cent next year.”
Such optimism is borne out by other evidence. The London stock market is booming in anticipation of a rapid upturn, prompting this comment from Michael Baker of ETX Capital: “It seems that we may have a much quicker recovery than was anticipated before.”
Nor is this just wild speculation. A recent survey by the Office of National Statistics revealed that, despite the lockdown, 77 per cent of companies were continuing to trade as normal, while 30 per cent of them claimed that their turnover had not been affected by the crisis.
Even for those sectors that have been badly hit, better times are on the horizon. The monthly snapshot of industrial purchasing managers, conducted by IHS Markit, showed that the index of activity rose to 40.7 in May from 32.6 in April. “The rate of contraction has eased considerably since April, meaning the worst of the production downturn may be behind us,” said IHS Markit director Ron Dobson.
Beyond all the doommongering, the fundamentals of our economy are strong. We have an entrepreneurial spirit, a sound financial system and a highly flexible labour market.
Before the pandemic, Britain was creating jobs at a record level, with the rate of unemployment down to just 3.5 per cent. Interest rates are at a historic low and, in contrast to the 2008 crash, credit is widely available.
And consumers have been able to save on an unprecedented scale during lockdown, with household deposits increasing by £16.2billion in April, well above the £5billion monthly average. Once the restrictions are fully relaxed, much of that cash could boost the services sector, which accounts for 80 per cent of the economy.
Many companies have also built up large reserves, helping overall sterling money holdings to rise by £37.3billon last month. “The wall of cash should limit near-term insolvencies,” says Samuel Tombs of Pantheon Macroeconomics.
WITH his £133billion programme of support, the creative Chancellor Rishi Sunak has not only prevented meltdown but has also put businesses in a prime position to recover.
Our country has weathered tempests before, such as the economic crisis of 1931, followed by almost a decade of growth.
The industrial strife of the late 1970s, when Britain was labelled “the sick man of Europe”, gave way to renewal under Margaret Thatcher.
“We have nothing to fear but fear itself,” said President Franklin on his inauguration in 1933, as he signalled his resolve to pull America out of the Depression. His words can still serve as an inspiration today.
‘We have entrepreneurial spirit and a sound financial system’