UK economy: a full recovery from the Covid slump will be slow
Twice as bad as the US. Ten times worse than anything seen during the financial crash of the late 2000s. Worse than any EU country. The UK is planted firmly at the bottom of the Covid-19 developed country league table after the economy contracted by a fifth in the second quarter of 2020, wiping out more than a decade and a half of growth in three months.
The reasons Britain is once again being dubbed by some “the sick man of Europe” are pretty clear. After weeks of dithering, the government imposed a lockdown that was tougher and lasted for longer than elsewhere. Germany reopened non-essential stores; after 50 days; in England it took 84 days.
Allowing the virus to spread to care homes meant the reopening of the economy was slow. Everything since then – from both the Treasury and the Bank of England – has been about damage limitation.
Boris Johnson and his ministers cannot be blamed for the arrival of a global pandemic. What will be an issue at the inevitable inquiry into why Britain had more deaths and suffered a bigger hit to growth than its rivals is the extent to which government mistakes intensified the crisis.
The latest data from the Office for National Statistics shows how the economy has evolved since the start of the year. Almost forgotten now is that activity had stalled in the final three months of 2019, so the UK went into the crisis at a relatively low ebb. Output started to fall in the last 10 days of March before coming to a virtual halt in April. There was a modest pick-up of 2.4% in May followed by a more substantial 8.7% rise in June.
This sounds impressive but as Samuel Tombs of Pantheon Macroeconomics pointed out, the level of gross domestic product – the official yardstick for gauging the size of the economy – was still 17.1% below its precrisis peak by the end of June. There is an awful lot of ground to make up and the fastest part of the recovery may already be over.
There will be a further increase in national output in July and August, and, in all likelihood, the biggest quarterly drop in activity on record will be followed by the biggest quarterly rise on record.
But from now onwards the pace of recovery looks likely to slow. The number of Covid-19 cases has been rising steadily for some weeks and the government is going to be cautious about reopening the bits of the economy that remain closed. It may even close parts that have already opened in order to allow children to go back to school next month. Closing schools was a double blow: it had a direct impact on the output of the economy and it had an indirect impact by forcing parents who would otherwise have been working to stay at home to look after their children.
Temporary measures – the cuts in VAT and stamp duty, in particular – should bring forward spending and lead to faster growth in the coming months than would otherwise be the case. On the other hand, the phasing out of the furlough scheme is already being accompanied by substantial job losses. It was telling that in his blitz of interviews Rishi Sunak did not downplay just how deep a hole Britain was in.
Structurally, an economy that is heavily dependent on face-to-face services is vulnerable to a loss of confidence, whether caused by Covid-19 or the fear of unemployment. Britain had a whirlwind slump that really only lasted for two months. Recovery will take a lot longer.