My institute’s new analysis confirms that we face an “off the scale” economic crunch. How to respond?by Jagjit S Chadha / April 18, 2020 / Leave a comment
A sombre day at the virtual Institute last Thursday. We had been working through the numbers for an assessment of economic prospects in the time of lockdown. The economy has been used as a tool to control the spread of this terrible virus and the result is that we are facing the worst quarterly outcome in modern times, which will be even worse than in the second quarter of 1921, when GDP fell by some 12 per cent. The worst post-war performance was in the first quarter of 1974, with a fall of nearly 3 per cent, and even in the worst quarter of the financial crisis, at the end of 2008, output “only” fell by just over 2 per cent. If the lockdown persists for the whole of April to June, it looks like output will be some 15-25 per cent lower than at the start. The numbers are stunning and off the scale of any normal fluctuations.
In a recession when demand falls, leaving firms to go out of business, governments are normally reluctant to do much beyond letting automatic stabilisers operate, which includes helping with income supports and benefits for those who lose their jobs. But what we have today is an induced contraction. We are slowing economic growth on purpose to limit the spread of the virus; almost a medically-induced coma in many sectors. The loss of income and jobs this time is therefore not directly the result of a change in market conditions, structures or faulty business plans, but the war against Covid-19. We started combat late and without much of the required ammunition, with a long-underfunded and depleted health service. And so we now need to work very hard to limit the damage.
There are three issues for us to plot. First, the macroeconomic response. How much more support can the Treasury find through income and jobs support, extending loan facilities and providing support for those now unemployed to start businesses and volunteer for those fields now in urgent need of labour inputs: distribution, social care, teaching and health? As it happens, much can be done virtually. But much cannot. There is space to borrow some 15-20 per cent of GDP without putting any great pressure on sterling markets, particularly if the…