At the beginning of August, the Bank of England released some new research indicating that the decline in economic activity in the UK would not be as bad as anticipated. Predictably, many of the papers were splashed with headlines about the new-found strength of the British economy. Perhaps the most brazen was the Daily Express, which read ‘Boris: Economy Showing Signs of Strength’ next to a picture of the prime minister lifting a dumbbell.
Unfortunately, the news was not as benign as the papers suggested. Rather than the 14% decline in output the Bank of England predicted in May, new estimates suggested that the British economy would contract by 9.5% in 2020. In other words, the worst recession in one century, rather than three. Unemployment would, the Bank stated, come in at 7.5%, rather than the 10% it predicted in May, or the 12% the Office for Budgetary Responsibility expected in June.
It should be noted that each of these figures are estimates — we won’t know quite how bad the recession through which we are currently living is until the end of the year at the earliest. We do know that in the second quarter of 2020, the UK economy was the worst hit of all advanced OECD economies. The average contraction in GDP across all OECD countries was -9.8%, with the UK coming in at -20.4%. The latest figures show that it climbed again in September, but nowhere near enough to restore the ground lost.
There is still a great deal of uncertainty as to the scale of the unemployment crisis currently gripping the UK economy. Different measures — from the claimant count, to tax returns data, to labour force surveys — yield vastly different estimates, and there are clear problems with each.
The claimant count often understates the scale of joblessness, as many jobless people — such as young people living with their parents — do not claim it. But as a report for the Resolution Foundation found in July, the claimant count could also be overestimating the scale of the crisis because Universal Credit is paid to many people who would not ordinarily count as unemployed.
What’s more, many people will simply have given up looking for work, which means they will be placed in the ‘economically inactive’ rather than the ‘unemployed’ category in surveys, even though this economic inactivity is often involuntary. Others may have opted to return to their studies or to take early retirement, and many more will have seen their hours reduced. These factors have an impact on the labour market but are not captured by headline unemployment figures.
The furlough scheme has exacerbated these problems of measurement. Firstly, many people who applied for Universal Credit may later have been informed they would be furloughed, leading to a higher claimant count. Secondly, there has been a great deal of confusion as to how to classify furloughed respondents to labour force surveys.
We simply don’t know how bad the unemployment crisis is at this very moment. Even if we had a more precise idea, there would remain a great deal of divergence in unemployment outcomes between different regions and age brackets. But anecdotal evidence suggests that, at least in some parts of the country, things aren’t looking good: in July, long before the second lockdown, 1,000 people applied for a single receptionist job in Manchester.
More generally, the Bank of England has no way of knowing the scale of the damage that the pandemic will ultimately wreak on the economy. Very few estimates factored in a second lockdown on the scale of the one we had seen in March – but that’s just what we have across England today, after many weeks of similarly damaging local lockdowns in much of the country. It seems increasingly likely that a vaccine is around the corner in 2021, but how deep will the economic problems be by then?
Consumer and business confidence will have to pick up substantially before we begin to see a real recovery. This simply won’t happen until the virus is under control, especially now that people are aware that further lockdowns are possible. Nervous consumers and risk-averse businesses are more likely to save their cash or put it towards paying down existing debts than they are to go out and consume and invest on the levels required to give us a real V-shaped recovery.
The decline in incomes associated with the pandemic could still catalyse a financial crisis, especially when government support for consumer and corporate incomes declines. Moreover, the banks administering the government’s ‘bounceback loans’ for businesses expect between 40–50 per cent of those in receipt of the loans to default when the scheme comes to an end.
Many more businesses could find themselves in trouble if output does not recover as quickly as the Bank of England currently expects. The rise in ‘zombie corporations’ — firms that only have enough income to service the interest payments on their debts — since the 2008 Financial Crisis has not helped matters.
If a significant proportion of both businesses and consumers find themselves unable to service their debts, we could still face a financial crisis in which banks are forced to call in loans and struggling debtors are forced to sell their assets in order to make their repayments. Falling asset prices throughout the economy would then begin to erode the solvency of even creditworthy borrowers — for example, falling house prices could send homeowners into negative equity.
So far, very active central banks have sought to avoid such a debt-deflation cycle by purchasing assets en masse in order to reassure markets that they will not allow prices to fall below a certain level. But it is far from clear that the current extraordinary measures being taken by the big four central banks can continue forever — though the political constraints on the behaviour of banks like the ECB are likely to remain larger than the economic ones.
We are facing the worst economic downturn in a century. And it is far from clear that the government is aware of the scale of the challenge it is facing. The one element of the Bank’s report that did not receive much media attention was its suggestion that the recovery from this crisis is likely to be long and slow.
This is hardly surprising given that the British economy had barely recovered from the Financial Crisis when the pandemic hit. Wages and productivity had both stagnated in ways that were unprecedented in modern economic history. The long-term impact that this crisis will have on our already weak economy is likely to be even more severe.
Young people are the ones likely to be most severely affected — especially those who cannot afford to attend university or extend their studies. All available evidence shows that entering the labour force during a recession leaves a long-lasting scar on a person’s earnings. And long-term unemployment can become self-reinforcing as people give up looking for work, often giving rise to severe mental and physical health problems.
Many of the measures implemented in response to the pandemic — under significant pressure from unions — have helped alleviate a significant amount of the pain. The furlough scheme, for example, was an obviously good policy. But many others have been exceptionally poorly targeted.
For instance, the Jobs Retention Bonus was a staggering waste of money, which most economists agree is unlikely to significantly impact unemployment and will instead simply boost the profits of corporations that were already likely to retain furloughed workers. And many huge multinational corporations have benefitted from government loans or guarantees while continuing to pay huge dividends and lay off workers, as Ben Smoke’s recent brilliant investigation for Huck magazine revealed.
As I and many others have argued throughout this crisis, the only way to deliver a robust recovery will be to invest in decarbonising the British economy, creating new jobs, and boosting productivity over the long run. The government should invest in jobs creation in areas like research and development, engineering and construction, and health and social care, which will both support the recovery and help the UK deal with long-term issues of climate breakdown and demographic ageing.
We also have the opportunity to use this moment to rethink the way we understand work. Germany’s largest union — IG Metall — has already called for a four-day week to save jobs, but a more expansive vision would push for a standard four-day working week with full pay to boost productivity, improve living standards, and support decarbonisation. In the UK, unions have given significant amounts of support to members facing job losses and have pressured the government to implement policies to help workers — now that we have seen how pivotal unions are to our economy, the removal of anti-trade union legislation must be at the forefront of our demands after the pandemic.
A green stimulus package is likely to create three times as many jobs as a ‘brown’ one and creating jobs in the care economy is disproportionately likely to support working-class women — one of the groups worst hit by austerity. The Left will, of course, argue that this investment should be paired with an expansion in public ownership, a transformation of the finance sector, and support for the labour movement to ensure that private firms do not reap most of the gains from state largesse. But even a more limited, Keynesian package of green spending would do a significant amount both to support those worst hit by this crisis and to decarbonise the economy.
And given that we are about to enter a Global South debt crisis even more severe than that of the 1980s, it is critical that these measures are replicated at a global level. Resources and technology must be transferred from North to South to support states dealing with the impact of the pandemic and climate change all at once. Ultimately, the only sustainable long-term solution will be a debt write-off for low-income countries.
A Green New Deal of one kind or another is the only viable route out of this economic crisis. The fact that the Labour Party cannot seem to find anything substantial to say on this very obvious policy proposal is worrying – without significant pressure from the Left, the fallout from Covid-19 looks increasingly likely to be another lost decade of wage stagnation and rising inequality.