To grasp how low are the expectations for the economy, consider this: on Wednesday it was announced that the UK’s national output had just had its biggest drop since the great crash of 2008 – and the immediate response of many analysts was surprise that it hadn’t fallen further. Even so, the statistics make grim reading. Over the first three months of this year, GDP shrank 2% on the previous quarter. The economy was already slowing in February, and then came the UK’s first coronavirus deaths. In March alone, GDP plunged nearly 6% – the greatest contraction since records began in 1997. Amazingly, most of that would have happened over just the last week of the month, the first full week of the government’s lockdown. The impact was drastic: travel agent demand collapsed, car plants shut and exports fell off a cliff. The winners were few and far between: the computer industry got a boost as those having to work from home bought laptops, while the paper industry had an amazing few weeks. All that hoarding of toilet roll proved good for someone.
However grim those numbers look, they are just the beginning. The near unanimous view among economists is that the UK is diving into what the chancellor, Rishi Sunak, warns is a “significant recession”. However bad that sounds, it is probably a gross understatement: the Bank of England is forecasting the worst recession in over 300 years.
The reason is simple: to try and quell the pandemic, this government has deliberately shut down huge swathes of the economy. Over the past few weeks, shops, offices and assembly lines have all closed. While England yesterday began the slow and risky process of lifting that lockdown, the other nations are still directing people to “stay at home”. On easily the most important issue of our time, Boris Johnson is effectively the prime minister of England, not the UK.
Many of Mr Johnson’s own backbenchers find this state of suspended economic animation “absurd, dystopian and tyrannical”, as the doyen of the Brexiters, Steve Baker, calls it. Others call for a balance between saving lives and saving businesses. Both criticisms are wrong. Even before the government ordered the lockdown, restaurants and pubs were going empty and parents were pulling children out of school. On this issue, the public was way ahead of Westminster and polls show they remain far more focused on tackling the pandemic then restarting commercial life. Indeed, the two are directly linked: lift the lockdown too far, too soon and the obvious risk is of a second wave of infections that would destabilise the public and derail the economy. The best way of striking a balance between commerce and safety is to commit seriously to a mass test and trace regime, as countries from Germany to South Korea are doing. Sadly, Westminster’s efforts in that direction have fallen far short.
In the meantime, the government will need to prop up households and companies with public money. This will be a costly business, but the time to worry about the total bill is not while hundreds of our fellow citizens are dying each week. On Wednesday, interest rates on some government debt fell below zero, so that bond investors were actually paying to lend the state money. The Bank has already announced it will pump another £200bn into money markets, and is likely to keep adding to that. There is, in short, precious little risk that the UK government will not be able to service its debt.
To talk now about austerity, to dream up tax rises or public-sector pay cuts to foot the eventual bill, as suggested by a leaked Treasury paper yesterday, is completely unnecessary. The key is to ensure that the bailout money is spent as fairly and effectively as possible.