Julian Jessop 24 June 2020
The economic recovery is already taking shape nicely – and the shape looks increasingly like a “V” after all. Despite this, many commentators are still pessimistic and even eager to emphasise the downside risks. It is time to view the glass as “half full” instead.
Let us start with what we already know. The economy shrank by an unprecedented 25 per cent in just two months between February and April, but it could have been even worse. The Office for Budget Responsibility’s projections for the public finances are still based on a 35 per cent fall in GDP, sustained for a full three months. The Bank of England had warned of a 30 per cent decline.
What’s more, there is now ample evidence that April was indeed the trough, and that activity picked up sharply in both May and June, even while large parts of the economy were still in lockdown. This evidence includes surveys of business activity, such as the Purchasing Managers Indices (PMIs) published by Markit. The handful of official numbers released so far have generally been better than expected too, including a 12 per cent jump in retail sales last month.
Indeed, both the OBR and the Chief Economist of the Bank of England, Andy Haldane, have now acknowledged that the economy is performing less badly than either had predicted. Even the record level of Government borrowing is slightly below the path that the OBR had pencilled in.
Of course, it is still too much to hope for a neatly symmetrical “V”-shaped recovery, where GDP returns to its pre-crisis level as quickly as it fell. But the latest data suggest that the UK economy should get back close to this level much sooner than many had anticipated, and the picture will look far more like a “V” than the “U”, or even “L”, that some had feared.
In the meantime, some households have been hit disproportionately hard, including many poorer families and the self-employed. Many of those on the Government’s furlough scheme are worried about losing their jobs when it ends. Nonetheless, most households have actually built up their savings during the lockdown. Pent-up demand is therefore still likely to be strong.
So, why the continuing pessimism? In part this may reflect several biases, some of which are more forgivable than others: bad news usually “sells” better than good news, many commentators are reluctant to appear complacent in the midst of a pandemic and may simply want to see more evidence, while others would never want to appear to give any credit to a Government led by Boris Johnson.
But to be fair to the pessimists, there is also still a chance that the initial “V”-shaped recovery is just the first stage of a “W”. This double dip scenario could come about for one or both of two reasons.
First, there could be a devastating second wave of the coronavirus itself. This would presumably force the Government to reimpose the lockdown, or at least prompt many consumers and businesses to behave as if it had. Others are better qualified than me to judge the likelihood of this happening, although most of what I have seen suggests that this risk is now small and that the UK is much better prepared than it was in March.
Second, the rise in unemployment so far might only be the tip of a very large iceberg. It is certainly possible that many more job losses will follow in the coming months as the furlough scheme is wound down. But again, I think it right to be relatively optimistic.
Crucially, the further easing of the lockdown is running well ahead of the timetable for scaling back the employment subsidies. There is also still more that the Government could do, should this be needed. However, the UK’s relatively flexible economy and labour market is pretty good at creating jobs on its own, if allowed to do so.
In short, ever since the early days of the coronavirus crisis, pundits have been debating how quickly activity would rebound when the lockdown is lifted, or indeed whether it could recover at all. Thus far, the evidence points to a pleasant surprise.