The Week UK - 04.04.2020

Briefing NEWS 15

4April 2020 THE WEEK

Howdireistheeconomicsituation?
Itisunprecedentedlyserious:“thefastest,
deepesteconomicshockinhistory”,in
thewordsoftheeconomistNouriel
Roubini.DuringtheGreatDepression
andthe 2008 globalfinancialcrisis,
ittookyearsforunemployment,
bankruptciesandcreditcrunchesto
materialise.Thistime,eventsare
unfoldingwithinweeks.Practicallyall
economicindicatorsaredown,andthisis
happeningagainstabackdropofalready
weakglobalgrowth.Economistsstruggle
toputnumberstothecalamity.Morgan
StanleyhasforecastthattheUKeconomy
willcontractbyaminimumof5.1%this
year.GoldmanSachsthinksUSGDPwill
declineby24%inthesecondquarter.
Similarcontractionsareexpected
throughoutEuropeintheshortterm.

What has the UK Government promised?
RishiSunak,ChancelloroftheExchequer, hasalreadybrought
outthefireextinguisher fourtimes.Inhis Budgeton 11March,
he announced£7bnforbusinessesand workers.Onlydayslater,
he added£330bnofloanguarantees topropup companies, and
£20bnofgrants forbusinessesinthemostaffectedsectors.On
20 March,Sunakplacedhisbiggest bet:anunprecedentedblank
cheque toprotectjobsandbusinesses,includingaCoronavirus
JobRetentionScheme,which willpay 8 0%ofaffected workers’
wages,upto £2,5 00 permonth.Cash-strappedbusinessesand
individualswillalsobe able todefer taxpayments.Although
greetedpositively, Sunak’s packagewascriticisedfornothelping
thecountry’sfivemillion self-employedworkers;as aresult,a
fourthpackage lastweekadded£9bnto compensatethisgroup.

How much does that add up to?
Sunakdeclinestoprovide anyfigure;thejobretention schemein
particularisveryhardtocost.Thereare 33 millionemployees in
theUK today,anditisnotcertainhowmanyof thesewillneedto
bepaid,and forhowlong.TheFinancialTimesestimates that
every million workers onthe schemewillcost £3.5bnper quarter.
Basedonadoublingoftoday’sunemploymentratetothe8%
seenafterthe financialcrisis,AXA
InvestmentManagersassumes that
1 .4millionadditionalworkerswill
use the scheme,at aquarterlycost
of £8bn. Attheveryleast, thedirect
spend for allmeasureswillamountto
£60bn, saystheFT; astimulus worth
about3% of GDP, comparedwith
2% duringthe financialcrisis. Add to
that the much largercost to the public
purse caused by theinevitable falling
tax revenues anddeclininggrow th,
and the2020-21budgetdeficitcould
increase fromapre-coronafigureof
2.4% of GDP,to1 0.2%.And that’s
notcounting new liabilitiescreated
by £330bnof loan guarantee s.

What else can governments do?
The world’s central banks have
already acted forcefully: more than
50 around the globe have lowered
interest rates in order to avoid a
credit crunch that would make it
even harderforcompaniesto survive.

Toavoidadeepandprolongedrecession,

theywillusetheirfullarsenalof

interventions,someoftheminvented

duringrecentcrises:quantitativeeasing,

crediteasing,incentivisedlendingand

zeroornegativeinterestrates.IntheUK,

theBankofEnglandcutitsratestwicein

March,downto0.1%,thelowestlevel

inits3 2 5-yearhistory.Italsorelaunched

a£200bnbond-buyingprogrammeto

preventliquidityshortages.

Howwillwepayforallthis?

Throughextraborrowing;noceiling

hasbeensetonthat.Britainhadbeenon

courseforabudgetdeficitof£55bnin

thenexttaxyear;theInstituteforFiscal

Studiesnowthinksthatnumberwillrise

byatleast£120bn.TheGovernment

wouldnotusuallybeallowedtoadd

debtatthisrate,butrulesthatlimittheExchequer’sfreedomcan

beexempted inacrisis.Theonlyrealoption besidesborrowing is

to raisetaxes,butthat wouldlower spendingpowerand sodefeat

theaimof supportingtheeconomy.Raisingfinanceviadebt

dependsonfinancialmarketswantingtolendtotheGovernment.

The UK’srecord-lowborrowingcostsshow thatinvestors are still

happy tobuyBritishgovernment bonds.Buteven iffinancial

markets weretomaketrouble, theBankofEnglan dcould resort

to printingmoneyandbuytheGovernment’snewdebtitself.

Printing moneysoundsdubious.Isit agoodidea?

Over thepast decade, usingtheprintingpresstostimulatethe

financialsystemhasbecome part ofthecrisis-handlingtoolbox.

Centralbankshave regularlyprintedmoneyeithertoinjectinto

commercialbanks(“quantitativeeasing”),orfordirectuse bythe

Treasury(“debtmonetisation”). Bothmethodsallow thecentral

bank (or,effectively,theGovernment) toborrowmoney anduse

it,onlytobuy the debtbackwithnewly createdmoney.These

manoeuvres increasemoney supply,whichenables higherpublic

spendingandstimulatesprivatedemand. Continuously adding

moneythisway willsoonerorlater driveup inflation.Ina

strugglingeconomythisisdesirable –it makes debtmore

manageableandaverts deflation–butif takentoofar,inflation

willerodetrust inthecurrency,and

ultimatelyrenderituseless.

Can we afford this spree?

Pre-coronavirus, theUK’snational

debt stood at 79.1%toGDP, a

historically highlevel. Post-corona,

economistsexpectittor eachover

100%, perhaps eventowartime

levelsof200%. All ofus wholive

and work in theUKare likely to pay

for itin threeways: by working hard

(creating growth);bybenefitingless

from publicspending(becauseof

largerpublic debt);andbyallow ing

inflation to transfer wealth from

savers to borrowers(andfromthe

private sectortothe Government).

The better question, though, is not

whether we can affordto do it,but

whether we can affordnotto. Only

if these rescuemeasureskeeppeople

in jobs andsave businessesfrom

wreckage will the worsteconomic

crisis of our lifetim es beaver ted.

Sunak’s fire extinguisher

TheGovernment haswrittenamassive blank cheque tocover thedamagedonebythepandemic. Canwe affordit?

Bailing outaround theworld

It’s not just Britain shovelling money into the

economy; globally, commitments have reached an

unprecedented $7trn, according to CNN. The US,

which saw 3.3 million people newly register as jobless

over one week, put the largest rescue package on the

table last week: $2trn for companies and individuals,

including unemployment insurance, loans and

“helicopter money”–cheques of $1,200 sent to all

Americans earning up to $75,000 annually, or to

married couples earningacombined $150,000. The

EU launchedaPandemic Emergency Purchase

Programme ofe870bn, equal to about 7.3% of the euro

area’s GDP. In France, President Macron promised that

no company, “whatever its size, will be exposed to the

risk of collapse”, adding that the state would be ready

to nationalise industries at risk. Germany, like Britain,

has pulled out all the stops, promising to pay 60%

of salaries for workers who go down to part-time.

The measures used by rich nations are not available to

many poorer ones: for instance, they cannot easily take

out debts in their own currencies. India, however, has

announceda$22bn (£19bn) bailout for the country’s

poor, in food and cash transfers. The IMF says it is

prepared to mobilise $1trn in spending.

TheChancellor:abusyfirstmonthinthejob