The United Kingdom under Prime Minister Boris Johnson issued a stay-at-home order for the country on March 24. To find out how these measures and economic stimulus from the government will affect the country, on March 30, Conor Akin of GLG’s Political and Economic Affairs team spoke with Jonathan Portes, Professor of Economics and Public Policy at King’s College, London, and Director of Aubergine Analysis Limited. Previously, Jonathan was Director of the National Institute of Economic and Social Research, a Senior Fellow at the Economic and Social Research Council’s Britain in a Changing Europe program, and also Chief Economist at the Cabinet Office, where he advised the British prime minister and the cabinet secretary on economic policy issues. This Q&A has been edited for length and clarity.
What impacts has the UK seen so far as a result of the pandemic?
The UK’s economy has already contracted sharply as a result of the government-imposed restrictions to slow the virus’s spread. In other words, we’re already in a severe recession. The only hard data we have so far is claims for universal credit. That’s essentially people losing their jobs, and the number of claims is between five and seven times the normal rate. Clearly, this is the biggest and the sharpest shock we’ve ever seen in this country.
What does that mean for output and GDP?
The most affected sectors are transport, hotels and restaurants, non-food retail, and some manufacturing. All car plants have closed. We estimate that at least 12% to 15% of the workforce and the economy is shut down. Financial services, consultancy, legal services, accountancy, and so on are much less affected. Some sectors will see an increase in demand, such as healthcare, but also online retail and communications. There were earlier estimates of a fall in GDP of 3% or so in the first half of 2020. That looks hugely optimistic at this point. Looking more broadly, I think the hit to GDP this quarter will probably be 10% to 15%. We’re in uncharted territory.
Which sectors and industries may be impacted the most in the longer term?
Barring absolute disaster, in six to nine months, we should be in a similar position in terms of the basic structure of the economy to the one we were in before the crisis. Will everything go back to normal? That’s a difficult question. To what extent will we shift to online services for delivering goods, such as restaurant food and supermarket food as well entertainment? To what extent will we move toward higher rates of working from home? That has obvious implications for broadband services, streaming services, and tools like Zoom. On the flip side, it has implications for transport, commercial property providers, office space providers, and so on. We don’t know the extent to which these temporary restrictions may become permanent shifts in how we live, work, and consume.
What will the policy response be?
In economic terms, governments normally deal in demand shock – demand falls because of shocked confidence, such as the 2008-09 financial crisis, so the government intervenes through fiscal and monetary policy to push demand back up to meet supply. This is a supply shock. Lots of people who are normally part of the workforce are now not because the government is deliberately saying don’t work, stay home. We’re trying to put the economy into hibernation for a period.
We want to ensure our ability to produce stuff is not permanently damaged after this crisis. Policy’s objective is to stop that by freezing the economy temporarily as much as possible. There’s a package of direct support to businesses through rate relief, special payments, and loan guarantees, all designed to reduce the probability that businesses go bust. The government is offering financial incentives to stop businesses from firing workers, saying it will cover 80% of the salaries of people earning up to £2,500 a month – roughly average full-time earnings in the UK. That’s unprecedented in UK history. There are also increases in welfare payments.
How will we know whether this is successful?
The test is whether it stops businesses from failing and unemployment from rising, or at least keeps those failures and rises to a minimum. In the long run, once restrictions are eased, the test will be whether these measures enable a bounce-back. A relatively quick bounce-back is plausible; history suggests that economies are more resilient to natural disasters than, say, to financial crises. Damage to the labor force is likely to be insignificant. That’s if the policies work, if we avoid second-order economic effects, like business failures. That said, this will be very expensive. We could easily see the budget deficit in the UK back up to 7% or 8% of GDP – £150 billion or so – quite quickly.
What are the best-case and worst-case economic scenarios for the UK? Do those change based on how long the enforced closures are in place?
The main impact of having extended closures is not necessarily that the fall in GDP gets that much worse; it means the recovery is delayed. The longer it goes on, the higher the probability there’s permanent damage to the economy. The optimistic scenario is that it falls by 10% this quarter and we recover almost all that the quarter after that. Six months after that, we’re back on pretty much the same path we would have been on if nothing had happened. The pessimistic scenario is that it falls 10%, but because the restrictions are prolonged, it doesn’t recover in the two quarters after that. Two years later, the recovery is much shallower – we’ve lost perhaps 5% of output permanently.
What is the likely trade-off between saving individual lives and the wider economic consequences?
There’s a surprising consensus that economic damage will be minimized by suppressing the virus as quickly as possible, even if that requires taking a big short-term economic hit. That’s for two reasons. Permanent damage to the economy is less likely if there is a big hit for a short time, then if things are spread out. The second reason is that half measures or even three-quarters measures aren’t necessarily going to make the economic hit that much less because as long as high levels of uncertainty exist, people will continue to be reluctant to invest, spend, set up new businesses, hire new workers, etc.
Once the pandemic is behind us, what will be economically different in this new normal?
The big unanswered question is how this affects global geopolitics and international economic relations. Does it further deepen what we’ve seen in the last few years, which was a slowdown in world trade and – parallel to that – increasing geopolitical and trade trend tensions? It’s not clear that this crisis will lead to any positive feedback for international cooperation. If anything, this will intensify tensions between the U.S. and China and perhaps also between the U.S. and Europe and China and Europe. None of that is good for the future progress of world trade or global international economic relations more generally.
About Jonathan Portes
Jonathan Portes is Professor of Economics and Public Policy at King’s College London. Previously, he was Director of the National Institute of Economic and Social Research, Britain’s longest-established independent economic research institute. He is also a Senior Fellow in the Economic and Social Research Council’s Britain in a Changing Europe program, which provides objective, impartial economic and social research on the potential implications of a UK exit from the European Union, as well as wider issues relating to the UK-EU relationship.
This article is adapted from the GLG teleconference “COVID-19 in the UK – Assessing the Economic Impact.” If you would like access to this teleconference or would like to speak with Jonathan Portes or any of our more than 700,000 experts, contact us.
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