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The Economy Will Not Simply Bounce Back

Yesterday's OBR projections that Britain would rebound spectacularly from the coronavirus crisis are wildly optimistic – and will be used to advance the case for harsh spending cuts if they go unchallenged.

The Office Budget Responsibility (OBR), official forecasters to the government, have produced their projections for the impact of Covid-19 on the British economy. Economics is condensed politics, and all economic predictions contain a political claim about what the world will be like in the future. In the case of the OBR projections, there is a grave danger that their ludicrous optimism will be used to push hard for austerity spending cuts and deregulation at precisely the point when the opposite is needed. 

The OBR believes the economy, as measured by GDP, will shrink by 35% in the next three months – the largest single drop on record. This isn’t the optimism, although it may, if anything, prove to be an underestimate of the true impact of the lockdown. The wild, starry-eyed optimism kicks in with the projection that the economy will immediately bounce back.

According to the OBR, the economy will grow so rapidly over the end of this year and into 2021 that we, by a miracle, actually avoid a technical recession – defined as two three-month periods of GDP falling. Meanwhile 2021 is projected to see growth for the whole year of nearly 18%, a rate of expansion never previously seen in Britain. After that, the economy settles back down to “normal.”

This is the rubber ball approach to economics. If you took one, and threw it hard at the floor, it would bounce back, high above your head, and then fall back into your hand. That’s the pattern the OBR are projecting. It means the economy will be, by the end of next year, left fundamentally unscathed by the impact of Covid-19 – with just much higher government debt to show for it, up to 95% of GDP on the OBR’s projection. 

This is seriously out of line with what even other mainstream forecasters are predicting. The International Monetary Fund (IMF) offered its own predictions yesterday, suggesting, like the OBR, that the impact of Covid-19 would be dramatic this year. But the IMF projected that recovery would be slow, with a recession dragging on – and with the UK one of the worst affected major developed economies.

Perhaps even more dramatically, the World Trade Organisation has claimed that global trade will slump by nearly one-third this year, but that – importantly – it will likely not recover its earlier rate of growth once the immediate health crisis has passed. In other words, they anticipate long-term effects from the crisis. 

There are good reasons for thinking, first, that the recovery will be slow and, second, that there will be long-term impacts. We can expect a slow recovery because the crisis means people have less to spend, businesses have less money coming in, and many of both are facing ruin. Personal financial catastrophes either now, or later, as debts held off come due in a few months are also on the cards.

Both will have longer lasting effects on the economy, because both imply lost demand and, for businesses, the permanent loss of jobs. The support offered by the government has been significant; but there are clear holes in provision, such as for the self-employed, and because the support has seemingly been designed to be unwound as quickly as possible, it is far less comprehensive and adequate that it needs to be.

A Universal Basic Income would have been preferable, but universal payments are very hard to get rid of once they are in place – as the endless fights over child benefit have shown. The result is that even in the best case scenario of a smooth and orderly exit from the health crisis today, and no second or further waves of covid-19 outbreaks, the recovery will be slower and weaker than a simple rebound. Government will have to step in and keep on spending.

But then we start to hit some of the potential longer-term effects. The WTO points to the disruption of supply chains in manufacturing, and the loss of trading partners for services. This would make the Covid-19 crisis a continuation of the pattern seen since the 2008-9 crash: of world trade growing far more slowly, and even regressing.

This disruption will impose costs on businesses, and lead to slower growth in general; meanwhile, the presence of a known pandemic risk – with additional surveillance, security, and healthcare measures required – would impose long-term costs on capitalism more broadly. Just as the 2008-09 crash led to permanently slower growth, so, too, might this crisis.

We don’t, however, need to speculate too much about the long-term prospects for global capitalism. Here in Britain, we’ve already seen, in the last decade, how OBR projections can get used politically. Its first set of forecasts, made in June 2010 just after the coalition government set the body up, said that the British economy would rebound from the crash at the most extraordinary pace: investment booming, trade flowing, household incomes rising rapidly. This turned out to be comically wide of the mark, but by suggesting the economy was fundamentally healthy, it created the space in which austerity could be – and was – argued for. 

That is the political danger now. The voices pushing for austerity, I suspect, will find their case a harder one to make: we are living through a spectacular demonstration of the value of public services and those who work in them. The sheer scale of the government debt now being incurred will make a case of austerity spending cuts more implausible.

More generally, we were already seeing the increasing presence of the state in the economy, even before Covid-19, and a clear turn on the political right away from laissez-faire – with the current prime minister in the lead. But the danger remains that a divide-and-rule austerity programme will be pushed by some, if the immediate health crisis ends: we can already see think tanks on the right and centre-right lining up arguments trying to pit the old against the young on the issue of debt repayments, for example.  

We will need, instead, a recovery programme based around not only supporting incomes for households, and cashflow for businesses, but investment to create a more resilient economy: more secure work, across more of the country, adapting to a changing environment. And we should start to raise some of the arguments that the crisis has brought to the forefront: of shifting how, when, and for how long we work, and opposing obeisance before mere GDP with a reassertion of the true value of public services and solidarity.