Where’s the plan for rebuilding our economy?
The Government must get past tedious political bickering and give business a strategy for the future
One of the most enduring ideas in economics is that of “creative destruction”, a Darwinian “out with the old and in with the new” concept by which economies supposedly evolve and improve themselves. When bad and obsolete businesses fail, it theoretically creates the space for new and better ones to emerge. It’s a reassuring thought at times like these, when lots of firms are on the verge of failure. Reassuring, but also, in today’s circumstances, possibly misleading.
We are certainly seeing a great deal of destruction in the carnage of Covid restrictions, much of it indiscriminate, but there is very little evidence of compensating creation. Beyond tech, home delivery, professional services (which always do well come rain or shine) and those sucking on the teat of public procurement, there are few signs of life amid the destruction.
We shouldn’t over-egg the doom and gloom, obviously. As Andy Haldane, the Bank of England’s chief economist, has warned, there is a danger of over-catastrophising our predicament. Haldane reckons that consumer spending is already back at prepandemic levels, and that the economy as a whole will have recovered 90 per cent of its losses by the end of October, leaving GDP between 3 and 4 per cent lower than it was before the pandemic struck. If correct, that’s a much swifter recovery than is typical after a big downturn. It took more than five years for UK GDP fully to recover from the financial crisis.
The present destruction is by contrast the result of a substantially self-imposed exogenous shock, rather than the ups and downs of the business cycle. Even so, that 3 to 4 per cent shortfall is still a big number and may prove resistant to further erosion.
After an initial plunge and partial rebound, activity has begun to flatline, making the overall shape of the Covid shock much more like the reverse image of the square-root symbol than the hoped-for V. What is more, many companies have moved beyond the immediate concerns of the virus into a more generalised phase of rationalisation and downsizing, much like what occurred in the early years of the Thatcher Government.
The 9,000 job losses announced this week by Shell had nothing to do with the pandemic, but are rather about the company’s strategy of transitioning to cleaner fuels. Likewise TSB’S decision to further slash its branch network, which is only tangentially related, in that Covid has merely accelerated the pre-existing shift to digital banking and cashless payments rather than caused it.
Outside leisure related sectors, most companies ought to be operating relatively normally by now, regardless of the restrictions, but in fact virtually everyone is using the cover of the pandemic to re-evaluate, to bring forward plans for greater automation, to digitalise and to shed less productive workers. In theory, this should make firms more competitive, which is obviously in itself a healthy phenomenon. The problem is that when everyone is doing it at the same time, no one gains any competitive advantage; the overall impact is merely that of reducing aggregate demand and supply in the round.
Throughout the pandemic, we have also seen another alarming plunge in business investment, far worse than anything witnessed on the Continent or in America. This may be related to Britain’s pending departure from the EU single market, but again it is something of an ongoing failing which has seen poor levels of investment in the UK economy over decades. The precise reasons for this deficiency are many and complex, but it is hard to resist the conclusion that at least some part of the immediate problem is the Government’s failure to articulate any kind of a plausible economic narrative for the UK’S post-brexit future.
In some regards this is understandable. The process of leaving the EU has been so politically allconsuming – never mind its potentially disruptive implications for established patterns of trade with our neighbours – that there has simply not been the bandwidth for thinking through what happens once we have actually left. There is also an increasingly evident split within the Tory ranks over what that future should be.
Amid today’s extreme levels of economic uncertainty, there are nevertheless at least two things we know for sure: one is that we are leaving the single market at the end of this year and the other is that in a year or two’s time the pandemic will be over. Both these certainties demand a response. Yet ministers – and firms – are still flailing around in a fog of unknowing. Are we to be a low-tax, lightly regulated, entrepreneurially led economy, or a big-state construct where much of the heavy lifting of economic growth is done via Keynesian-style public spending?
It is small wonder that companies have gone on investment strike; there appears to be no strategy for breathing new life back into the economy, only the tedious political brinkmanship and bickering of EU trade negotiations and the crushing imposition of unfathomable new Covid restrictions. If people are making matters worse by catastrophising, we know who to blame.