The latest GDP estimates tell us, with the authority of official government statistics, what we already knew. Thanks to the lockdown caused by coronavirus, the last quarter (April to June) recorded the deepest slump in economic activity within living memory (the anoraks will argue about whether we are talking centuries or a bit less).
But we shouldn’t get too excited about quarterly GDP statistics. They are provisional, and they are by definition backward-looking, not a forecast. The methodology used is too crude to capture many of the subtle but important changes experienced in the pandemic: the productivity changes resulting from the shift to home working for office workers, professionals and the self-employed; the qualitative difference between education delivered in a classroom and by teachers from a distance or parents at home.
The Bank of England (BoE), whose quarterly deliberations on monetary policy depend on having the best and most recent statistics available, has been downplaying doom and gloom and its most recent estimate for this quarter was a 23 per cent drop from Q4 in 2019, after earlier predicting 28 per cent. The figures released today suggest that the change in that period is “only” 22.1 per cent.
As the UK economy recovers from lockdown, there is bound to be a partial rebound in the current quarter. Expectations, however, that the economy would bounce back sharply in the form of a V-shaped recovery are dampening. Some activities are still closed by law (my local dancing school among them) and some businesses have been so crippled by the closures, that they won’t be reopening. The Bank of England recently forecast that the UK could be back to end-2019 levels by the end of 2021, but that has been widely criticised as unrealistic given the “scarring” which is already visible.
We simply do not know whether there will be continued lockdowns, local or national, as the pandemic evolves. Business investment is very weak for obvious reasons of chronic uncertainty. Consumer surveys suggest that, even when people have spending power, they are nervous about shopping and eating out or are hoarding cash, fearing that there could be worse to come.
And export prospects are poor with the IMF expecting a 5 per cent fall in the world economy over the year, and (modest) growth recorded only in China, of the world’s 16 biggest economies. Internationally, the UK will be not be the worst or the best performer, better than stricken Spain but worse than the better performers in Europe and Asia.
The government and the BoE now seem inclined to wait until the late autumn before deciding on their next move. The furlough scheme, subsidising the jobs of almost 10m workers, expires at the end of October and it will be clearer then whether the unemployment situation is catastrophic or merely disastrous. The optimistic forecast of the BoE was that, after job losses of 1.2 million, unemployment at the end of the year could be 2.5m (7 per cent of the labour force) which would be lower than in the post-financial crisis period, in 2011. Pessimists think we could be looking at four million out of work.
If the outlook looks really bad in three months’ time the BoE will make more use of asset purchases (quantitative easing) and could experiment with negative interest rates. The government may also feel it has no choice but to give another stimulus through an injection of spending or tax cuts. However, the mood music from the Treasury is that they have had their Keynesian fling and are determined to get back to spending controls and balanced budgets as soon as possible.
In the meantime, there are several policy issues looming which will keep the airwaves busy for the next few months. The first is that in a world where a virus can rear its head quickly and unexpectedly anywhere, there are further uncomfortable choices to be made. Should the economic importance of pubs and the hospitality sector take precedence over education, for example? One of the worst and most damaging misjudgements of this period – for which blame is widely shared – has been the lack of commitment to opening schools.
Disadvantaged children in particular have suffered irreparable damage and an even bigger gap has opened up with the independent sector where more successful efforts were made to ensure continuity of teaching, albeit remotely. The government vacillated and made insufficient preparation for school reopening. Many parents still seem to believe, wrongly, that young children are at risk, and teachers are seemingly expecting higher standards of protection than are available to other key workers.
The real problem is community transmission. That means it is my generation which must get used to the idea that if we want to keep safe we shall have to be more isolated. We cannot sacrifice the future of the country’s children.
The other issue reaching critical levels of danger is Brexit with the end of the transitional period only a few months away and no new agreement in sight, let alone the shiny, new, comprehensive, free trade deal we were promised. I took the view that Brexit was “done’ and nothing was achieved by shouting into the echo chamber. I also assumed that, faced with the Covid-19 crisis, the government would have the sense quietly to negotiate even some fairly minimal continuation agreement with the EU to keep uncertainty and disruption to the minimum. I worry now that I have been altogether too optimistic and too willing to assume that the government was capable of rational calculation.
Brexit hardliners are now threatening to reopen the Withdrawal Agreement they voted for last year. Iain Duncan-Smith was, as always, uncompromising, suggesting that the absence of an agreement with the EU would enable Britain to reopen the issue of the financial settlement and the Irish issue. Flushed from his success in persuading the government to make an adversary of another major trading partner, China, he is mobilising his back-bench troops for another revolt.
It is difficult to see Boris Johnson having the stomach for a fight with people to whom he owes his job. If so, all those arguments which raged this time last year about ‘crashing out’ will return. Keir Starmer and others who have, wisely, kept quiet about Brexit for a few months will soon find that they are back in action again.
Today’s GDP figures describe a truly grim passage in our national economic life. But they look backwards. If we dare to look forward, I am afraid there could be worse to come. If the government is driven by the worst ideologues among its supporters – over Brexit and resisting any further stimulus – it will be choosing to fashion a catastrophe out of the crisis.
Sir Vince Cable is the former leader of the Liberal Democrats and served as secretary of state for business, innovation and skills from 2010 to 2015