saving the economy

No one was much looking forward to the UK GDP figures for April. But, from an academic perspective, at least we learnt “what happens to the economy” when normal life shuts down, said the London Evening Standard. The resulting 20.4% plunge in GDP was “the greatest economic collapse in our recorded history”. To describe the figures as shocking doesn’t do them justice. By comparison, the 2008-09 crash caused Britain’s GDP to fall by 4.2% in 2009. “Now we have managed 20.4% in a month.” The fall will be less pronounced over the year as a whole (the OECD predicts the economy will shrink 11.5%). But it nonetheless raises a “chilling” question. “Having endured one of the developed world’s highest death tolls from Covid, will we now go on to suffer one of the worst recessions as well?”

The bottom line is that “nobody really knows”, said Jeremy Warner in The Sunday Telegraph: the fact that this was an “artificially generated recession” has taken us into unchartered waters. Yet the uniquely unbalanced nature of the UK economy – with our heavy dependence on domestic consumption and services – has made us “particularly vulnerable to Covid-19 and the measures needed to get the disease under control”. As nonessential stores reopened in England this week, there were hopes in some quarters that consumers might lead the recovery, said Russell Lynch in The Daily Telegraph. Don’t count on it. “As a country we spent £400bn last year” – but “the chances of all that cash coming back in a glorious burst of pent-up consumerism are slim”. The latest Bank of England data shows cautious consumers “deleveraging” and saving at a record rate – we squirrelled away £30bn over March and April combined. We could end up stuck in a “classic Keynesian liquidity trap” of “low inflation, negative growth and fear of the future driving savings despite rock-bottom rates”.

The Treasury has made “valiant efforts” with its job retention scheme, “as has the Bank with its rapid provision of hundreds of billions of emergency credit”, said Will Hutton in The Observer. “But over the next 12 months, Britain risks an explosive rise in unemployment and social distress” as these schemes are wound down. “With nothing so far planned to take their place, the combined impact will be devastating.” The Government needs to move quickly and start “thinking the unthinkable”. For starters, we may need a wage subsidy, to prevent mass-sackings. How is all this to be financed? The old rules need torching. Issue perpetual bonds that don’t have to be repaid and, if necessary, supplement the bond proceeds by printing money. “Britain is facing a looming first-order economic disaster. The risk is not thinking big enough in response.”