IN any crisis, a dogged effort amid the tumult to minimise the long-term damage is absolutely crucial.
Such an effort has rarely seemed more vital than amid the human tragedy that is the coronavirus pandemic. It is clearly not easy to combine dealing with the immediate fall-out of any crisis – in this case crucially focusing on minimising the death toll while also preventing a collapse in the economy and living standards – with achieving the clarity of vision to mitigate longer-term damage. However, those in government around the world have a responsibility to do so amid the Covid crisis, for the good of us all.
Some economic “scarring”, in terms of permanently lost output, sadly looks inevitable around the world. This is not an abstract thing – lost output will translate directly into reduced employment opportunities and living standards. The trick is obviously to deploy the right policies to minimise the permanent loss of potential output following the Covid-19 crisis.
Heavyweight analysis of likely scarring in countries around the world is crucial in formulating policy and alerting those countries with the biggest challenges.
In this regard, the Organisation for Economic Cooperation and Development’s latest outlook, published this week, is an important contribution. And it is worrying indeed that the OECD concludes the UK could suffer the biggest loss on this front among the Group of Seven leading industrialised nations. It is notable, but not at all surprising, that Brexit is flagged as a key factor in this projection.
Many of the headlines in the UK on the OECD report were dominated by the projection of 7.2% growth in the country’s economy this year, which would be the fastest rate of expansion since 1941.
This is obviously in some respects a heartening forecast – signalling a relatively robust rebound.
However, context is crucial.
The OECD’s upwardly revised forecast for 2021 growth, although much higher than its projection of 5.1% back in March, is broadly in line with that published by the Bank of England last month. So it should have come as no great surprise.
The Bank of England last month raised its projection of UK expansion this year to 7.25%, from 5% back in February. However, it also cut its projection of 2022 growth from 7.25% to 5.75%, so some of the upward revision to forecast expansion this year is a matter of timing. The OECD projection for UK growth next year is, at 5.5%, similar to that of the Bank of England.
Looking further ahead, the Old Lady of Threadneedle Street last month maintained its forecast of UK expansion in 2023 at 1.25%, which is a weak rate of growth by historical standards.
Crucially, when it comes to the context of this year’s growth forecasts, we must remember that UK gross domestic product plunged by 9.8% last year amid the coronavirus crisis, the most precipitous drop for more than 300 years.
Meanwhile, we have, sadly, not yet reached the peak in unemployment.
The OECD projected this week that the unemployment rate, on the International Labour Organisation measure, would peak at 6.1% at the end of 2021 as the UK Government’s coronavirus job retention scheme is phased out.
This is a significantly less-optimistic projection than that from the Bank of England, which forecast last month that UK unemployment would peak at slightly less than 5.5% in the third quarter of this year on the ILO measure.
Both the OECD and Bank of England forecasts signal further significant misery on the unemployment front in the UK from this point. The latest ILO unemployment rate, covering the January to March period, is 4.8%. And ILO unemployment was around 4% at the onset of the pandemic.
The misery that has occurred so far is much plainer in the UK claimant-count unemployment number. This figure, which measures the number of people claiming unemployment-related benefits, has more than doubled from 1.24 million in February last year to in excess of 2.6 million.
The unemployment picture would have been much more horrendous still had it not been for the coronavirus job retention scheme through which UK taxpayers fund the incomes of furloughed workers. However, we must also remember that Chancellor Rishi Sunak’s enormously perplexing tardiness in extending this scheme last year will have triggered many unnecessary job losses.
The dismal figures on what has happened so far, and projections of worse to come as Mr Sunak’s September end-date for the coronavirus job retention scheme looms large, highlight the extent of the challenges facing the UK. Some parts of the economy remain so far away from any kind of normal level of activity, and are virtually closed in some cases, so Mr Sunak must bear this in mind and reflect seriously on what appears to be a continuing very significant need for furlough support.
The Chancellor should, as we move forward, also think about the global “policy requirements” laid out by the OECD.
The think-tank says: “Fiscal and monetary policy support should be maintained while there is still labour market slack and limited signs of sustained price pressures. The premature and abrupt withdrawal of support should be avoided whilst economies are still fragile and growth remains hindered by containment measures and the pace of vaccinations. Such a policy mix will maximise the joint effectiveness of each policy and minimise the risks of long-lasting scars, thereby supporting government debt sustainability.”
It adds: “Government support to individuals and businesses should be maintained but should be increasingly targeted on sectors still affected by containment measures. Recovery plans should also prioritise new measures, regulatory and fiscal, that support demand, improve the prospects for digitalisation of the economy and help tackle climate change.”
In terms of the challenges facing the UK both now and over the longer term, it is interesting the OECD highlights the huge drag on the UK economy from Brexit in its summary of the outlook for the country.
It is completely right for it to do so, especially given some of the more astute Brexiters will continue to be smugly aware that for many people the impact of their folly is being masked to a significant extent by the huge economic fall-out from the pandemic.
Summarising the outlook for the UK, the OECD says: “Strong GDP growth of 7.2% in 2021 and 5.5% in 2022 is projected as a large share of the population is vaccinated and restrictions to economic activity are progressively eased. Growth is driven by a rebound of consumption, notably of services. GDP is expected to return to its pre-pandemic level in early 2022. However, increased border costs following the exit from the EU single market will continue to weigh on foreign trade.”
It was interesting this week to observe the strength, entirely justified, of the reaction by James Withers, chief executive of industry body Scotland Food & Drink, to a characterisation of the Brexit aftermath as the UK having been “frozen out” of the single market.
Of course, this is not the case. The UK Government chose a hard Brexit, with the ruling Conservatives continuously hell-bent on leaving both the single market and customs union over the years following the 2016 Leave vote.
Mr Withers tweeted: “More Brexit gaslighting. The UK was not frozen out of the single market. We chose to climb into the freezer, shut it behind us & ask for it to be locked from the outside. Now we’re complaining it’s cold. This is the Brexit we chose. No single mkt, no customs union, no vet deal.”
It would be interesting to see how on earth Brexiters might try to disagree with Mr Withers’ forceful but fact-packed synopsis of the current situation.
As the worst of the pandemic hopefully passes, people’s thoughts will turn increasingly from battling grim everyday realities to reflecting on the long-term impact of the pandemic, with their lives having been turned upside down in so many ways and talk of a “new normal” ringing hollow.
And, in an economic context, experts and others will focus on potential output that has been lost permanently.
Addressing this issue, the Paris-based OECD declares in its latest outlook: “GDP plummeted in 2020 in most countries, following the Covid-19 outbreak, and restoring pre-crisis GDP levels will take time in many of them. A key issue is the extent to which shortfalls may persist into the medium term through reductions in supply potential. As past crises have shown, such reductions can be substantial.”
And, looking at how the situation is likely to affect the G7 nations, it says: “Amongst the major advanced economies, losses are estimated to be relatively small in Japan, Canada and the United States. Declines in potential output growth in major euro area members could be 0.3 percentage point per annum on average over 2019-22. The United Kingdom could suffer the biggest reduction amongst G7 countries (a decline of 0.5 percentage point per annum), in part reflecting the additional adverse supply-side effects from 2021 following Brexit.”
Surely for a UK Government that seems to like to strut about on the international stage, under the leadership of Boris Johnson, overseeing the biggest long-term economic scarring of any of the G7 countries amid the pandemic is something that should merit at least a moment of reflection, maybe even leading to some greater self-awareness. Such reflection should lead naturally to some policy-making to mitigate the damage but experience of recent years would suggest hopes that this might happen would be misplaced.