In a webinar attended by over 330 clients and guests of Eton Bridge Partners, on Wednesday 20th May, guest speaker David Smith reflected on the highly unusual times we were in. Rishi Sunak, the chancellor, had said that the economy was in a serious recession, “the likes of which we have never seen”. Some 10 million people are being supported by the government’s furlough scheme, or its self-employment equivalent. The biggest post-war quarterly fall in gross domestic product until this episode was just under 3%, during the three-day week of 1974. This quarter’s fall could be 10 times that. The unemployment rate, just under 4% when the crisis hit, may be heading for 10% or 15%. Government borrowing – the budget deficit – is officially estimated to be heading for just under £300bn this tax year, up from the £55bn estimate at the time of the March budget.
David addressed three topics: the shape of the recovery, the permanent changes in the economy in future and what the government should be doing.
1. Many people in business are sceptical when economists talk of a V-shaped recovery. But there is likely to be an “economic V” as lockdown restrictions are eased, provided that people’s reluctance to leave lockdown can be overcome. They may have no choice once the furlough scheme is withdrawn. An “economic V” will occur because an economy operating at, say, 75% of normal in the third quarter will be a lot bigger than one operating at 60% of normal in the second. For similar reasons, the economy in the spring of 2021 will be a lot bigger than in the spring of 2020. For business, however, it will not feel like a V. Though there will be big differences between sectors, moving from 60% of normal activity to 75%, then 80%, does not feel like much of a recovery. Only when turnover is back to normal and beyond it will it do so, and it could take three or four years to get back to where we were in 2019. There is a similar story in the job market. Employment growth has come easily in the past three or four years, and the government has forgotten about all the measures it used to call on to get unemployment down.
2. What about the changing shape of the economy? It is important not to overstate the impact of something that has only been with us for a matter of weeks and months. But the high employment/low productivity sectors – coffee shops, restaurants, hotels, entertainment – may not come back in the way they did. Business travel, the need for face-to-face meetings, the need for large offices in expensive cities, will be reconsidered. Many people in business have seen this as a real-life experiment in things they were considering anyway, including a greater proportion of staff working from home and so on. And we sometime forget that there are whole areas of economic activity which revolve around people working in office environments. We should not get carried away. We are social animals and we are at our most creative when we get together in the same room. There was a huge amount of gloom about air travel, understandably, after 9/11. But after three years air travel got back to where it was and resumed a strong growth path. Things will change, however. Consumers have learned that there are quite a lot of things that they can do without.
3. What should the government be doing? The furlough scheme may have had unfortunate side effects in making too many people comfortable with lockdown. There are now two cliff edges, one in late July and one at the end of October, both of which could be tricky.
Apart from that, there is a strong case for the government to be thinking more strategically about the kind of economy it wants. The crisis has exposed weaknesses in the UK, including in areas like pharmaceuticals in which we thought we were very strong. Will it result in reshoring of manufacturing activities? How should the government think about taxation and incentives? There is no case for big increases in taxation to pay for the crisis, but there is a case for better and simple taxation. Should we be better prepared for other long-term risks e.g. climate change. After failing to prepare for a pandemic that had been on the government’s risk register for years, politicians will not be easily forgiven for not preparing for the next crisis. We should not bet starry-eyed about this. Governments will grab hold of anything that looks like a return to normality. Nor should this usher in a safety-first, risk-averse approach to everything, which would be the worst thing for our entrepreneurial economy.
In discussion, issues raised included the prospect of negative interest rates from, which Smith thought could easily happen though they are a bad idea. Would there be a wave of mergers and takeovers when the immediate crisis has passed? Yes, in all likelihood, and this would be part of the process of “creative destruction” which follows recessions. Should the Brexit transition period be extended beyond the end of the year to allow more time for negotiation? Smith said that it should be, and that it probably would be, despite the government firmly ruling it out at present. Finally, we discussed the US presidential election. Smith said it would break all precedents if Donald Trump were re-elected on the back of a record recession and very high unemployment but that he had broken plenty of precedents before. If Joe Biden were to be elected, it would not usher in a new era of US openness, if anything the opposite, and the proposed US-UK trade deal would have lost its champion in the White House.
A huge thank you to David for his presentation. We appreciate you taking the time to share your latest insights and answering our questions on the current UK economy.
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