I have spent the last week trawling through up-to-date high
frequency data to get a sense of where the UK economy stands. It does not
make for pretty reading. Without going through all the indicators, one of the
obvious places to start is with electricity output, taken from the National
Grid at four hourly intervals. It is difficult to draw direct inferences for
output given that factors such as temperature play a significant role in
determining demand, but the fall in output following the introduction of the UK
lockdown on the evening of 23 March is very marked (chart below). It is
particularly noticeable that output during the day has fallen sharply whereas
off-peak output has not, which is indicative of the collapse in demand from
businesses that would otherwise be open and consuming electricity, such as
shops and offices not to mention the power hungry manufacturing sector. A rough
estimate suggests that output is down by around 3-4% compared with pre-lockdown
trends, which I reckon is consistent with a GDP decline of up to 15%.
Wherever you look there is evidence of an economy which has
simply hit the buffers. Rail journeys are down 95% on this time last year
whilst the number of bus passengers is down 88%. People are also using their
cars much less, with overall traffic numbers down 71%, though on the plus side
those that do have to travel on the roads find that congestion has eased
considerably (chart below).
The retail sector has also taken a significant hit. Footfall
is down by around 80% compared to a year ago whilst the collapse in spending in
the leisure sector has been almost total, with restaurants and pubs having been
shut for two weeks. My calculations suggest that consumer spending in Q2 could
fall by up 20% which is likely to mean a double-digit collapse in GDP growth.
As workers are laid off, some temporarily but some perhaps permanently, we are
likely to see an unprecedented rise in unemployment. We already know that the
number of claimants for Universal Credit rose by almost a million in the second
half of March, although since this includes people claiming in-work benefits as
well those making unemployment claims, it is difficult to know how this will impact
on the labour market figures. However a conservative estimate suggests that the
jobless figures for April could show a rise of up to 2% in the unemployment
rate. We have never seen such a sharp jump: the usual pattern once an economy
falls into recession is for unemployment to pick up with a lag as the corporate
sector adjusts slowly.
My guess is that this will lead to an annual reduction of
around 6.5% in real GDP this year. To put this into context, based on the BoE’s
long-term historical databank which contains GDP data back to 1700, this would
represent the sixth worst output decline in the 319 years for which estimates
are available. We have to go back to the immediate aftermath of WW1 for
anything remotely like it. Faced with an output reduction of this magnitude, my
concern remains that any economic recovery will be a protracted affair. Company
earnings will take a huge hit which will shape their business practices for a
long time to come. In many instances this will force a strategy rethink with
attendant consequences for investment and employment. Unlike the post-2008
period which was characterised by companies being propped up by low interest
rates and the substitution of labour for capital, the coming years may well see
a more pronounced period of Schumpeterian creative destruction.
Business models which rely on complex supply chains will
likely be overhauled. If we had concerns about rolling back the globalisation
trend before, the post-crisis world will almost certainly produce a sea change.
The inability of countries like the US and UK to produce sufficient personal
protection equipment for front line medical staff can be expected to spark a
debate about the extent to which western economies rely too heavily on foreign
producers to provide the manufactured goods they need. Suggestions that the
likes of India are withholding drugs for use at home that they would otherwise
export will further fan the flames of economic nationalism.
I will deal with the fiscal fallout in more detail another
time but it is clear that we are going to be awash with government debt for
years to come. It is unlikely we will be able to grow fast enough to
significantly reduce the debt-to-GDP ratio given that we are faced with an
ageing population, which leaves us with two alternatives. Either governments
will have to embark on a policy of major austerity, which is likely to be
highly unpopular given the experience of the past decade, or the real value of
debt will have to be inflated away. Central banks have spent the past 20 years
lauding their achievement of taming inflation and tell us today that they have
no intention of relaxing their vigilance. I would not be so sure: Policymakers
have a habit of changing their mind if the circumstances demand it.
Flexibility will be the name of the game in future as electorates
make different demands of their governments than they have in recent years. We should
be no illusions as to the profound social and economic changes that are to
come. But first we have to get through the current crisis!
