the times | Tuesday July 21 2020 1GM 41

CommentBusiness

John Maynard

Keynes knew public

confidence was crucial

O

ne of the bleaker

footnotes to the Office

for Budget

Responsibility’s fiscal

sustainability report last

week was that its optimistic scenario

for the coronavirus recovery was

“probably about as good as one

could hope for, but the downside is

by no means a worst case”, as Robert

Chote, its chairman, put it. The

“upside” scenario was a V-shaped

recovery by the middle of next year,

but the “downside” was a 14.3 per

cent fall in GDP followed by a weak

4.6 per cent rebound in 2021, four

million people losing their jobs,

unemployment remaining elevated

in 2024 and it taking four years to

recover the 25 per cent of GDP lost

in April and May.

If a once-in-300-years catastrophe

was not bad enough, David Owen at

Jefferies, the investment bank,

published another set of possibilities

last week that are the more

worrying for not being outlandish at

all. What, he asks, if there is a

second leg down? Not caused by a

second spike, but by the economy

simply going into a normal

recession, as opposed to one

deliberately induced to prevent a

health disaster.

The OBR dared not speak of a

second recession. Even in the

downside case there is not one

single quarter of negative growth

after June, but a slow and steady

recovery. Yet look closer at the

detail, as Mr Owen did, and the

clues are there. In the worst case,

house prices fall by 15 per cent by

June next year, commercial

property is even “more adversely

affected”, unemployment is

“persistently high” and private

consumption has not recovered even

to its pre-crisis level in real terms in

2024.

Every one of those details

normally would be a flashing

recession sign, but not in these

projections. And there is more. The

corporate sector is expected to

continue borrowing “contrary to all

recessions in the past”, Mr Owen

said. Normally in a downturn,

businesses go bust, loans default,

debt is written off and banks pull

credit as they start losing money.

Losses on commercial and

residential property loans are often

the catalysts.

This time, though, businesses are

expected to go on borrowing. It is

just about plausible. Banks have

been supportive so far and dividend

and bonus restrictions will help

them to build more firepower.

Companies have been raising equity

and losses on the new coronavirus

loans will be borne largely by the

taxpayer. But there will be big

defaults on pre-existing loans, too,

and when the pain comes, the banks

will have to back away.

It’s not hard to map out the second

leg down. Hospitality, retail, travel

and tourism — sectors that account

for about 15 per cent of the economy

— cannot bounce back until there is

a vaccine. Costs are rising in every

industry, but particularly those most

affected by social distancing. At

least one retailer’s Bond Street store

is little more than a glamorous

online packing site now. Costs up,

sales down spells one thing — job

cuts. And they are already coming

thick and fast. Marks & Spencer’s

950 redundancies are the latest, but

they won’t be the last.

Mr Owen expects a false dawn in

the third quarter, with a sharp V-

shaped bounce of about 13 per cent

GDP growth. But as furlough ends,

jobs are cut, insolvencies rise, credit

is pulled, spending falls and property

prices suffer, the normal recession

will start. If there is to be 1980s-style

mass unemployment, which is the

OBR’s central scenario, why not a

1980s-style recession, a 5 per cent

cumulative fall in output? The

answer is that there probably will be

unless the government is able to

kickstart growth by successfully

changing behaviour with schemes

such as its half-price food vouchers

or with more tax cuts and spending.

A second spike in infections as the

weather turns or a disorderly Brexit

adding more complications for

business, though, and all bets are off.

Philip Aldrick

Recessions create

scars. The Covid-19

recession will be no

different. The birth

of new companies

and new jobs — replacing those

destroyed by the pandemic — will lag

the eradication of the virus.

Confidence in public health,

household finances and company

balance sheets will take time to

recover. It is the asymmetry in what

John Maynard Keynes called “animal

spirits” that has meant, on average, it

has taken four years for UK output to

return to pre-recession levels.

Proponents of a V-shaped recovery

do not have history on their side.

The most visible impact of a

recession is the resources it leaves

idle, whether these are unemployed

people, unused machinery or

unmined databases. The task of

policymakers is to reduce the length

of time that these resources are left

unused and subject to scarring. The

government deserves credit for its

recent rapid response to protect jobs

and companies. However, much of

this support has generated an

artificial reality. Furloughed

employees can quickly become the

unfurloughed unemployed.

Leading indicators of job

availability have collapsed in recent

months. There were 650,000 fewer

Britons on employer payrolls in June,

compared with March. With furlough

support beginning to taper next week

— and set to be removed at the end

of October — there are concerns that

the UK may once again see an

unemployment rate above 10 per cent.

Investors are also seeing structural

changes accelerating. Those in the

commercial property sector already

knew that online retail and flexible

working were important trends.

Covid-19 has meant changes that

were expected to take years

took weeks. Between

2009 and last year the

share of UK retail

sales generated

online grew from

10 per cent to

20 per cent. This

year it is more

than 30 per cent.

Business models

and investments

based on steady changes in behaviour

have been thrown into chaos.

No one knows how much of this

change in behaviour will persist if, as

the prime minister hopes, the

economy returns to normal this side

of Christmas. Should the way we all

work and use our leisure time alter

permanently, then furlough will have

kept workers in sectors where viable

jobs will simply not return.

Matching labour supply to labour

demand is a key enabler of a healthy

jobs market. While many a recent

opinion piece has focused on the UK’s

productivity and job-quality issues, it

would be incomplete not to mention

the strides the economy has made in

reducing unemployment. Going into

the Covid-19 crisis, UK joblessness

was at its lowest level in more than 40

years. Much of this came from a

greater understanding of what

worked — and what did not — after

the shift in labour demand that took

place during the 1980s. Policymakers

entered that decade with confidence

that transitions could occur by the

unemployed getting on a bike and

looking for work. Subsequent analysis

of working lives, and policy successes

by Labour and Conservative

governments, showed the merit in

more active support.

This means that matching the

supply of potential workers to new

patterns in labour demand after

Covid-19 need not require radical

policy innovation. It is the far less

glamorous job of supporting what we

know works.

First, to find work, potential

employees must be searching for it.

One of the innovations during the

1990s was the requirement to be

actively seeking work to access

unemployment support. This was why

one of the least-reported parts of

Rishi Sunak’s summer update was

perhaps the most important.

Funding for 27,000 work

coaches recognises

that workers cannot

seamlessly move

out of sectors

whose prospects

will be

permanently

impaired by

Covid-19.

Second,

incentives matter.

As an economist in

the Department for

Work and Pensions in

the early 2000s, I was struck by the

interaction of state benefits and in-

work income that meant that many

leaving unemployment for work faced

benefit withdrawals of upwards of 90p

for every earned £1. The rights and

wrongs of how universal credit has

been introduced in recent years are

not for this column, but the principle

of making work pay is crucial to a

rapid labour market recovery.

Advocates of a universal basic income

or an extension of furloughing

support need to consider whether a

temporary reduction in the 63 per

cent taper rate of universal credit may

be a more effective policy.

Third, the government needs to

build on its vision for the job-creating

sectors. Investors putting capital to

work or students considering

vocational qualifications require

signals of where they will find the

best returns. This is not about picking

winners; rather it is a drumbeat of

which sectors Britain intends to

insource supply for either economic

or strategic reasons. Amid Brexit and

Covid-19, the government has done

insufficient work in translating its

industrial strategy into practical

advice. An efficient job-matching

function requires people to have a

keen sense of what the future holds.

Finally, labour market recoveries

come in two stages. Initially, it is

individuals with transferable skills

that find new jobs. These people

require little support. But there will be

a long tail of workers whose skills do

not neatly match new demand. When

combined with complex care,

occupational health and

accommodation needs, then the

matching function becomes more

challenging. This is where public

investment generates stellar returns

in recognising that some of those who

will lose their jobs because of Covid-

19 will need access to services to

support their return to work.

Ministers keen on hard hats and hi-

vis vests may find such investment

difficult to support — particularly

with eager press officers and advisers

keen on tangible investments. But the

levelling-up agenda

has no chance of

success if the

hardest to help are

left behind.

‘‘

’’

Recovery will work only if those who

are hardest to help are not left behind

Simon French is chief economist at

Panmure Gordon

Patrick Hosking is away

Philip Aldrick is Economics Editor of

The Times

Economy may not have

a leg to stand on when

next recession strikes

GDP scenarios v pre-crisis forecast

Sources: ONS, OBR

80

70

90

100

110

2019 20 21 22 23 2024

Upper and lower scenarios

March forecast

Central scenario

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