BU's emeritus Professor Nigel Jump writes the next in his series of blogs looking at the local economy through the Covid-19 pandemic.
The world economy has bounced up from Q2’s Covid19 lows, but momentum is fragile. Much of the bounce is pent up demand for the short-term rather than renewed growth for the long run. The eurozone has seen consumer confidence wane as the ‘second’ wave of pandemic threatens. China is still doing reasonably well but Japan is soft (having fallen less than most previously). America is growing at a more moderate pace. US jobs are up 10.6 million from the nadir but fell by 22.2 million during the collapse: there is significant ground still to make up.
The latest UK data for July showed:
- real GDP rose by 6.6% but was still 11.7% below the February 2020 monthly level. Roughly half of the ‘lost’ output came back: the V-shape recovery was underway but there is a long way to go and it may yet stall.
- Industrial production increased but was still 7% below February’s “normal”. Manufacturing and utilities were ‘better’, (led by transport equipment). Services (led by education) and construction (both new work and repairs and maintenance) climbed but were still 12.6% and 11.6% respectively less than February’s levels.
- The unusual trade surplus widened as low domestic demand cut imports more than weak overseas demand cut exports, especially for vehicles and fuels. Excluding precious metals, the surplus in July was £6.4bn compared with a deficit of £3.7bn in the same month a year earlier.
- Regional labour statistics showed the SW unemployment rate still held down to 3.8% in the three months to July compared with a UK average of 4.1%. (The north-south divide persists.) In the year to June 2020, about 24,000 workforce jobs were lost in our region. More locally, the claimant count rates in August were 6.6% for Bournemouth, Christchurch and Poole and 4.6% for Dorset County - up from 2.4% and 1.6% respectively a year ago. The expected climb in unemployment has started.
This quarter (Q3, July-September) is recording a bounce in UK economic activity from its predecessor. The SW Business Activity Index for August was 59.3, representing a second month of expansion, but the employment index was 41.1, indicating shrinkage. The question is whether this heralds a V-shaped recovery that can gather pace or is merely the second section of a W-shape which will see renewed slowdown through the winter (see Blog 2, June to explain these recovery shapes).
Sadly, the next period of slowdown may be worsened by new trade barriers with the EU (tariffs and regulatory blockages) if the Brexit transition ends without a proper trade deal and with other (NI) internal market issues. Economic activity will remain below the Q4 2019 peak for the foreseeable future.
The lockdown recession is instigating a range of structural changes that will take some time to play out through the economy. A transformation of many work and business practices suggests a full V-shaped recovery is implausible and a sequence of stops and starts (a series of Ws?) is possible, with certain sectors powering ahead even as others find it hard to kickstart activity.
Given this background, the policy world is likely to remain volatile around the central tenets of:
- the Bank of England (BoE) supporting liquidity
- the Treasury (HMT) supporting labour and productive capacity, and
- the Business and Trade departments supporting investment and exchange.
In all cases, the aim is to maintain, sustain and promote capacity and capability for the benefit of long-term productive growth and competitiveness.
At the recent, annual Jackson Hole central bank fest, (this year on-line of course) both the US Federal Reserve and the BoE stressed the need to stay loose on interest rates and money, and not to worry about inflation overshooting targets (currently still undershooting at 0.2% year to August – subdued by the eating out policy but underlying still under 1%) if that stops unemployment rising. Members of the BoE’s Monetary Policy Committee (MPC) have voiced concerns about the ending of temporary government support for employment leading to a winter drag on demand.
Meanwhile, rumours speak of higher wealth (pension contributions and capital gains) and fuel taxes to come in the autumn budget and some spending cuts in the Comprehensive Spending Review. It seems too soon for these tightening measures to be applied now, but they will need to be applied in 2021/22 or later: an eventual constraint on future demand to be carried out when the private economy is functioning again. Timing is everything.
This is particularly true for supply. It takes time to instigate new methods and develop new facilities and, thereby, to boost productivity, profits and jobs, and drive underlying growth potential upwards. It takes time to create the new and better trade and exchange links and competitive supply chains that can underpin well-being and living standards for the long run. This is especially so in a world of significant change to business and work practices as dictated by changing values and technologies: not least to encourage environmental and social sustainability as well as economic success.
The challenge is to manage a fundamental transition, involving the more efficient and effective reallocation of resources across industries. For the long run health of the economy, this could turn out to be a strongly positive process towards better outcomes for productivity-led growth.
The trouble is it requires painful adjustments in the near term, which will hurt some households and some firms. Recent small business closures will be reversed eventually, but it may take years. In pursuit of “Global Britain”, how the distribution of positive and negative effects is managed and mitigated will prove to be a crucial test for both political and commercial decision makers.
One aspect of this adjustment is the enormous public and corporate debt burdens built up in response to the pandemic and its aftermath. The UK growing debt burden will come down over time via three mechanisms:
- Growth – the best way to pay off debt but seldom enough on its own, especially for a mature economy working with environmental constraints
- Austerity – control of state spending and higher taxation that dictates incentives and alters the social distribution of impact
- Repression – forcing savers’ returns below inflation to allow the public sector to access funds cheaply and to encourage funds into real activity now, (rather than saving for later – the proverbial rainy day is here). This requires potential adjustments through exchange rate competition, trade and other barriers, and price and market controls.
The danger is that austerity and repression affect inflation expectations more than, or before, growth prospects as low interest rates and abundant money supplies sustain the high debt levels. The ideal is that debt is used to invest in supply side capacity that boosts future productivity rather than in demand side consumption that threatens higher inflation and, thereby, future living standards.
Meanwhile, the government should think about issuing very long-term bonds to finance itself. It will take years to rectify recent state borrowing, we might as well admit it by extending the length of the debt (to 50- or 100-year gilts?) at current low interest rates.
The crisis has needed some demand side stimuli in the short term (furloughed workers, eating out subsidies etc) but a switch to more supply side actions (innovation, skills and infrastructure) will be needed as the UK moves to a blended future of new digital, personal and business contact behaviours. I will try to consider some of these actions and options for Dorset in my next blog.