The Covid-19 recession feels mild compared with the 1980s – so far
Those of us with long enough memories can vividly recall the recession of the early 1980s. Unemployment climbed inexorably as many of the big names of British industry collapsed or were restructured. The economic pain was palpable and bled straight into popular culture, music and TV drama in particular. Even now, just the mention of Boys from the Blackstuff conjures up the despair of joblessness and communities torn apart.
Compared with the hit taken by the economy this year, the slump of the early 80s was a mild affair. The 25% peak to trough fall in output seen in two months, March and April, was four times the decline suffered in 1980 and 1981. Yet so far at least it can’t really be said that the recession has been four times as bad.
There are a number of possible explanations. One is that the recession of the early 80s had deep structural consequences. It helped break the trade union movement, it marked the point at which Britain ceased to be a manufacturing economy and became a country that specialised in financial services, and it shifted the economic geography of the country to London and the home counties.
A second is that the slump was due in part to deliberate policy choices on the part of Margaret Thatcher’s government. To be sure, much of UK industry was already being hampered in the early 80s by the strength of the pound, driven higher on the world’s currency markets by Britain’s new status as a major oil producing nation. But an added twist was provided by the use of sky-high interest rates that the govern
ment deemed necessary to bring inflation under control. To her supporters, Thatcher did what had to be done. To her detractors, she was brutal and callous.
The comparison between the thrust of macroeconomic policy in the early 80s and today could hardly be more stark. Interest rates are not 15% but 0.1%, and the Bank of England is mulling the prospect of reducing them to below zero. The pound is at a competitive level against the dollar and the euro. Rather than raising taxes and cutting spending, the Treasury is planning to borrow more this year than any government in peacetime.
Activist policy has meant, for now, that the recession of 2020 has been a bit like the period between September 1939 and May 1940, something of a phoney war. Figures from the Office for National Statistics show that national income fell by £85bn between the first and second quarters of 2020, but the government suffered by far the biggest drop – of £50.1bn – as a result of its grants, tax holiday and income support schemes. Businesses’ profits dropped by £26.5bn. Households’ income fell by £8.6bn, a modest drop in the circumstances.
As Paul Dales, the chief UK economist at the consultancy Capital Economics, rightly notes: “The overwhelming bulk of the pain from the huge 20.4% quarter-on-quarter fall in real gross domestic product in the second quarter – which hides the bigger peak to trough fall of 25.6% between February and April - has so far been borne by the government and businesses rather than by households.”
So far households haven’t endured much of the recession, but as Dales adds, that is about to change because the winding down of the furlough scheme is the point at which Rishi
Sunak started to offload the pain on to households and businesses.
Lay offs are inevitable as struggling businesses find that the cost of employing workers is going up. So while the monthly data from the ONS shows economic activity starting to recover in May, the recession in jobs is only just beginning. For most people it is hard to tell whether the economy is growing or not. Being laid off is a different matter. It brings home the reality of recession.
The chancellor seems to be aware of the risks of rapidly rising unemployment, even though he has so far resisted calls to tailor the furlough to the needs of specific sectors. Instead, he has taken to exhorting employees to return to their normal place of work.
London, which accounts for more than a fifth of the UK’s national output, is a particular headache for the government. The latest research by Morgan Stanley shows that only 31% of London office workers are back at their desks, whereas in Paris, Madrid and Berlin the figure is 74%, 66% and 76% respectively.
This matters, because a sophisticated support economy – everything from sandwich bars to taxi drivers and wine bars to clothes shops – has developed to cater for the needs of office workers in London and the other big metropolitan cities. It is easy to see why branches of Yo! Sushi and Jigsaw are being earmarked for closure.
It remains to be seen whether the trend toward working from home is sustained. Employers seem genuinely wary about trying to force workers worried about contracting Covid-19 back into the office, but may also decide that if their staff are working from Essex or Bedfordshire there is no need to pay them a London wage premium. A threatened cut in pay could well make the office look attractive again.
If sustained, the trend toward working from home would have profound knock-on effects in terms of commuting, the importance of London, the retailing and hospitality sectors, team working, learning on the job from more experienced colleagues and the transition to a net-zero carbon Britain.
The economy would eventually adapt to these structural changes, as it did after the recession of the early 80s. But only with time and only after a lot of pain.