The fall in the UK’s economic output in the first three months of this year, as reported by the Office for National Statistics, is big – the largest contraction since the last recession. But be in no doubt that this is really a glimpse into the abyss, rather than the plunge itself.
Official forecasting bodies such as the Bank of England and the Office for Budget Responsibility expect the second quarter of 2020 to deliver a Gross Domestic Product (GDP) contraction so large that the 2 per cent fall seen in the first quarter will seem a mild stumble.
Last week the bank set out a scenario in which the British economy shrank by 25 per cent in the second three months of the year – an order of magnitude more than in the first quarter. That would be, by some distance, the worst quarter in UK history.
So what does all this mean for ordinary people? What does it mean for those who are already suffering economically, for people who have been furloughed by their employer, for people who have perhaps already lost their jobs or seen their income dry up?
It’s become a commonplace in recent years to argue that GDP is not everything, that we shouldn’t use it as a catch-all indicator of the economic health of a nation. And that’s true. It’s a measure of raw national economic output, aggregate spending and aggregate income rather than human welfare or wellbeing. And it doesn’t tell us who the proceeds of that economic growth are flowing to.
Arguably, that’s all especially true in the current circumstances. This will not be a normal recession, brought on by a loss of confidence among households or bad investments by business, or – as in 2008 – some crisis among banks. This recession is deliberate – that is to say, it’s been brought on by the lockdown imposed by the government to protect people’s lives, possibly hundreds of thousands, from a dangerous new coronavirus against which we have no vaccine or natural immunity.
And it’s a lockdown which, polling suggests, has had the strong backing of the majority of the population.
To that extent, the collapse in activity over the first half of this year can be regarded as the medicine working. If activity was not falling, that would mean that the lockdown was not succeeding in suppressing face-to-face human interactions in shops, pubs, gyms and the like.
The key economic question is not by how much activity falls – because that is a byproduct of an intentionally disruptive public health policy – but how rapidly we can restart it when the crisis is over.
That’s what really matters for people who have lost their jobs, have seen themselves temporarily laid off, or who have had to take cuts in their pay. They need the recovery to be strong, swift and sustained. Have they reason for hope?
After the last recession, the recovery was weak and faltering – hobbled by a failure to restructure banks and then by premature public sector austerity. We need to avoid making similar policy mistakes this time.
There are some signs this time might be different, that ministers are alive to the special nature of this recession and the need to adopt radically different policies in response. The furlough scheme has already protected some seven and a half million workers who would otherwise have been made unemployed and also kept them connected to their employer. Most of their income will be maintained at least until October and the scheme offers hope that many will be able to return to their jobs as the economy starts to reopen.
Other emergency measures include government-guaranteed loans for small businesses and cheques to replace the income of the self-employed, with the latter due to start arriving next month.
We will likely need similarly unorthodox and radical policies to ensure we come out of this crisis relatively smoothly.
There will be many terrifying headlines about GDP to come over the coming weeks. But people should focus on what really matters: incomes, livelihoods and, most of all, the recovery.