BOURGEOIS ECONOMICS


THE DEEPEST RECESSION, BUT ALSO EASILY THE WEIRDEST

Posted by David Smith 
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Sunday, March 21, 2021

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt.

This time last year, give or take a few days, I was giving a talk in Birmingham. I had arrived late the night before and had not been out that morning. A couple of members of the audience remarked, however, on how eerily quiet the streets were. A lockdown had not been announced but people had already started to change their behaviour. Little did we know as we exaggeratedly bumped elbows – something I have not done much since – how strange the next 12 months would be.

What was on the way, of course, were more than 125,000 Covid-19 deaths, tens upon tens of thousands of stories of personal tragedy and loved ones unable to see each other even at times of serious illness, death and severe mental strain. What followed were the most onerous restrictions on everyday life and normal business activity that most of us have ever seen and would hope not to see again. Lives were blighted, particularly the lives of the young in education.

For the economy, what followed was, frankly, off the scale. A year ago, the economy was sliding into recession, even before the first lockdown. Gross domestic product fell by 7 per cent in March 2020, contributing to a 2.9 per cent fall in the first quarter of the year, the biggest drop since the three-day week of 1974.

That was just the appetiser. In April, GDP plunged by a further 18 per cent as the economy locked down. That was the main contributor to the 19 per cent slump in GDP in the second quarter of last year, easily the biggest on record. If this is the first draft of history, economic historians will be marvelling at these numbers for decades to come.

But then something rather different happened as restrictions were lifted. Starting in May, the economy grew for six months in a row. It slipped back in November, by 2.3 per cent, grew in December and managed to eke out 1 per cent growth in the fourth quarter, before falling back again by 2.9 per cent in January. We thus got very much better at handling lockdowns compared with the first.

The result of this is that, in the worst recession since the Great Frost of 1709, measured by GDP, there was monthly growth in seven of the 11 months for which we have data. This quarter will see at most a modest fall in GDP. As fort hat “worst since 1709” comparison, which I have used extensively, there are questions whether it its appropriate to compare with a time before the industrial revolution, when the harvest-related swings in economic activity were huge, in both directions, and nearly two and a half centuries before GDP was invented in the way we know it today.

Though the “worst recession for a very long time” label is likely to stick, it may be that the current estimate of a 9.9 per cent GDP fall last year will be revised lower as more data comes in. The Office for National Statistics has said that its estimates are subject to greater than usual uncertainty because of the pandemic.

That is not the odd thing about the past 12 months. Despite all the despair and tragedies I described above, and the severe setbacks for many individuals and businesses, on many measures it did not seem like a recession at all. Corporate and individual insolvencies have, as the Insolvency Service notes, remained low since the first national lockdown. Last month company insolvencies were 49 per cent lower than in February 2020, while individual bankruptcies and debt relief orders were down 42 per cent.

Weekly company incorporations – new business formations – are also showing significant year=on-year gains, as they have been for most of the period of the pandemic. Some say businesses are being established to qualify for government support, but I doubt that is the main explanation.

There are other odd aspects to the recession. You do not expect incomes to rise strongly at a time of economic pain but this is what has happened. In the final quarter of last year wages and salaries in aggregate, the biggest component of household incomes, were up by 2.8 per cent on a year earlier at a time of very low inflation. For 2020 as a whole aggregate wages and salaries showed a rise in real terms.

The big question for the recovery is not whether beleaguered consumers have money to spend, but how much of the £148 billion of deposits, mainly involuntary savings, they built up during the first three quarters of last year - £100 billion more than the previous year – will be spent.

Unemployment, at 5.1 per cent of the workforce, is at a level that many past politicians would have given their eye teeth for, in terms of it being so low. It will rise but probably not by very much, and the Bank of England will soon revise down its prediction of a 7.75 per cent unemployment peak. The Office for Budget Responsibility predicts 6.5 per cent.

The common thread here, as you may have discerned, is the unprecedented extent of government intervention in the economy. Government spending in the current fiscal year, 2020-21, will be the equivalent of 54 per cent of GDP.

The Treasury puts the scale of its Covid-19 support for the economy at £280 billion this fiscal year, and for a total of more than £350 billion this year and next combined. A significant part of those ages and salaries described above will have been provided by the government via the furlough scheme. The government could not prevent the hit to GDP largely but not entirely caused by its own lockdown restrictions, but its actions greatly limited the impact

We are now, one hopes, on the way out of that, and into a period in which the economy can stand on its own feet, though in a webinar I was doing the other day, businesses taking part were not so convinced. Nearly half thought there would yet be another lockdown and roughly 90 per cent believed some restrictions would return next autumn and winter. The champagne corks are not yet popping. Most were also sceptical about the pace of recovery and did not see the economy as the “coiled spring” beloved of Andy Haldane, the Bank’s chief economist.

For consumers, things are now looking up after this extraordinary, and very weird time. Though the survey was done before news emerged of delays in vaccine suppliers, Friday's consumer confidence index from GfK showed a notable bounce of seven points. It has now shown a considerable recovery since the gloom of January, and an even lower point in November, the second lockdown, though it is still quite a bit lower than a year ago.

Consumers, the guardians of those savings that are waiting to be spent, think the past 12 months have been terrible for the economy but the next year will be a lot better. They are more upbeat about their personal financial situation over the next 12 months than they were a year ago. They, like the rest of us, will be hoping for something that is not as weird as the past 12 months have been.