the times | Wednesday April 8 2020 1GM 37

CommentBusiness

Industrial cities

bore the brunt of the

Great Depression

R

ishi Sunak borrowed

Mario Draghi’s phrase

from the eurozone crisis

when he promised to do

“whatever it takes” to

bring Britain’s economy through the

coronavirus pandemic. But what

exactly does it take?

The new chancellor was genuinely

decisive in pledging billions of

pounds to help companies by

underwriting loans and buying their

debt in the form of commercial

paper, but there is an as-yet-

unaddressed question: how can we

ensure that businesses stay alive after

this crisis, as opposed to merely

fending off their short-term collapse?

As policymakers realised after the

Great Depression and the Second

World War, government must step in

as the partial owner of businesses.

That is an unattractive idea for

present-day Treasury officials, who

break out in a cold sweat at any

mention of the multibillion-pound

bailout of the banks in 2007-09. They

need no reminding that Britain still

owns a 62 per cent stake in Royal

Bank of Scotland. Nevertheless, that

experience of more than a decade

ago, confronting a crisis of banks

with too little capital hoarding cash

and not lending to businesses, has

formed their thinking now.

The authorities’ reflex reaction to

the collapse in business activity

caused by coronavirus has been to

push banks to lend and to help them

with state guarantees. Businesses

clearly do need loans, but there is

only so much debt that they can take

on. To avoid a legion of zombie

companies and firms emerging from

this crisis, the government needs to

find other ways to support them.

One is by injecting equity, which

does not come with a monthly

interest bill but the prospect of a

payout — when other shareholders

come in, when the company has

enough cash to buy out the equity or

when the business is sold. And the

government has done this before: in

1945 the Industrial and Commercial

Finance Corporation was created to

provide capital to small and medium-

sized businesses. It grew to become

Britain’s biggest provider of growth

capital for unquoted companies, was

renamed 3i and was floated in 1994.

Going down the same path again

would be a formidable challenge.

Holding equity requires monitoring

to ensure that a business’s

management does not take out large

amounts of cash, sell assets or

generally do things that would be

inappropriate for a taxpayer-backed

business. Equity is also riskier than

debt, which comes with expectations

of being repaid. Shares can be wiped

out, and some undoubtedly would be.

There will be questions, too, about

which companies to back. The high

street names that were struggling

before the virus hit? Businesses

working in valuable but high-risk

areas of medical research? Private

companies with no access to public

markets? Public ones where there is

already a pattern of equity

ownership? Or a mixture of some or

all of the above?

At least the government would not

start from scratch. After the financial

crisis, five banks were ordered to pay

£2.5 billion to create the Business

Growth Fund to help to support small

businesses. It has invested £2.1 billion

in 320 companies since 2011. It

operates commercially, but does not

make payments to its shareholder

banks, instead reinvesting any

proceeds in new loans.

The BGF is sitting on about

£1 billion that it could invest. That

would be a start to help businesses to

prepare for their most dangerous

time — emerging from a recession

and trying to restart growth. The

Treasury would need to pump in

more cash if it decided to make

equity part of its plan to do

“whatever it takes”. It also could

require existing shareholders to co-

invest with the fund, particularly in

larger companies.

The government has put taxpayers

on the hook to cover the plethora of

grants and likely bad debts that will

stem from this shock to the economy.

Done fairly, making the public part-

owners of businesses could allow

them to benefit from the recovery.

David Smith

Katherine Griffiths

Unprecedented.

That is the number

of times I have used

“unprecedented” in

the past two or three

weeks, and this is no journalistic

hyperbole. We have not seen anything

like this before. The fall in economic

activity, in gross domestic product, is

unprecedented. Now, too, a growing

number of people who a few weeks

ago did not see a recession on the

horizon think we are more likely to

face a depression.

What’s the difference? Harry

Truman’s dictum is one way of looking

at it: “It’s a recession when your

neighbour loses his job. It’s a

depression when you lose yours.” It

was adapted by Ronald Reagan when

he fought the 1980 presidential

election, when he said: “Recession is

when your neighbour loses his job.

Depression is when you lose yours.

And recovery is when Jimmy Carter

loses his.” Reagan won, but Carter

perhaps had the last laugh, when the

economy quickly succumbed to the

recession of the early 1980s.

Recessions and depressions are

mainly differentiated by duration.

Though many will be familiar with the

standard definition of recession —

two consecutive quarters of declining

gross domestic product — it is not

particularly useful. Postwar recessions

in Britain have been of varying length.

The 1973-75 recession saw an initial

fall in GDP that lasted three quarters

(a period that included the three-day

week of early 1974) and a second,

briefer GDP fall in 1975. The first of

Margaret Thatcher’s recessions, in

1980-81, was severe but short-lived,

four quarters, while the one that

started at the end of her premiership,

the 1990-92 recession, involved a five-

quarter downturn, a bit of bumping

along the bottom and a further small

decline before recovery began

in mid-1992.

The biggest recession

of the modern era so

far, 2008-09, was a

neat if savage five-

quarter affair, with

GDP falling by

6 per cent from

peak to trough. It

also comes closest

to what we might

think of as a modern-day depression.

It took five years, until 2013, for GDP

to get back to where it was in early

2008, before the recession.

That is the same duration, for the

UK, as the Great Depression, when it

took until 1934 for GDP to get back to

the pre-depression peak. Yes, I know

that when people think of the Great

Depression they have in mind The

Grapes of Wrath and the Jarrow

March. The first is because the effects

of the depression were many times

more severe in America. The second is

because the genuine misery and high

unemployment in this country was

concentrated in certain industries and

the industrial heartlands of the north,

Wales and Scotland.

The 1930s also enjoyed a British

building boom — the house I was

born in was called a 1930s semi for a

reason — and a flowering of

consumer products, including the

motor car. Two successive years of

falling GDP, 0.9 per cent in 1930 and

5 per cent in 1931, were followed by a

prolonged recovery from 1932

onwards. The other postwar

recessions described above came

nowhere near being characterised as

depressions. In each case, the pre-

recession peak was reached in roughly

three years.

There is, I should say, a tougher

definition of depression, which is a

prolonged period of falling GDP. So

2008-09 and its aftermath would not

meet this definition, although Greece’s

eight-year period of declining GDP,

during which it fell by a cumulative

25 per cent or so, would.

It is a different kind of 25 per cent

we are dealing with now, with some

forecasters predicting that Britain’s

GDP will fall by that much in the

second quarter of this year alone.

Even conservative forecasters predict

a drop of 10 per cent to 15 per cent.

David Owen, an economist

with Jefferies International,

the investment bank,

expects near-25 per

cent second-quarter

GDP — following

on from a 1.4 per

cent drop in the

first quarter and

to be followed by

a drop of nearly

2 per cent in the

third — under

what he describes as

an “extended

shutdown” scenario. In

another outlook, in what he calls a

“second wave-second shutdown”

scenario, GDP is down nearly 24 per

cent this quarter, before a subsequent

recovery and then a second but much

smaller drop in GDP in early 2021.

These are dramatic numbers. They

will not come about precisely and,

clearly, if the lockdown were to end

very soon, which does not look likely,

they would overstate the downturn.

For comparison, the biggest postwar

quarterly fall in GDP, in early 1974,

was 2.7 per cent, the three-day week.

As I say, unprecedented.

The interesting thing about even

these dramatic projections is that they

are followed by strong recoveries as

the crisis subsides. Jefferies has GDP

falls of 15 per cent to 18 per cent this

year, in the two scenarios, followed by

growth of 11 per cent to 18 per cent

next year and by 4 per cent to 7 per

cent in 2022. Within a couple of years,

GDP is back to where it was before

coronavirus hit. In statistical terms,

the recession will have been a

rollercoaster, but shorter than any of

its postwar predecessors.

This is where you have to wonder

whether we will need a new definition

of depression. As many readers point

out to me, it will take them and the

businesses they work for years to get

over this. Firms painstakingly and

lovingly built up over decades will not

survive the slump in GDP, even with

government assistance. The “scarring”

effects of the inevitable rise in

unemployment, even if job retention

measures limit it to a degree, also will

last. Young people, particularly those

who have seen their last weeks at

school and exams disrupted and those

entering the labour market from

school or university, could be

permanently disadvantaged, if the

experience of the period following the

financial crisis is anything to go by.

So we have two different things

happening here. For economists and

statisticians, this is a stomach-

churning lurch down and then back

up again, as the crisis passes. For

people and businesses, it is something

that will have a legacy and a return to

normal that

stretches for many

years. One man’s

recession is

another’s depression.

‘‘

’’

David Smith is Economics Editor of

The Sunday Times

[email protected]

Katherine Griffiths is Banking Editor

of The Times

Now may be the time to

give the taxpayer a stake

in an economic recovery

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For economists, it’s a rollercoaster

recession but for others a depression