Ian McConnell: A V-shaped recession is least-bad economic outcome amid coronavirus tragedy but is it achievable?

A key survey published this week by the Chartered Institute of Procurement & Supply has confirmed the drop in combined UK manufacturing and services sector output has been precipitous.

CIPS’s seasonally adjusted, flash composite output index plunged to 37.1 in March, from a final February reading of 53. The latest reading is way below the level of 50 deemed to separate expansion from contraction, and signals an even-sharper drop in output than at any time in the depths of the global financial crisis and ensuing 2008/09 recession.

We should bear in mind that early March felt relatively normal. There was certainly not a sense at the very start of March that we were about to get the grim intensification of the coronavirus crisis we have now seen in Italy and Spain, and are currently also witnessing in the UK and many other countries

And, while there were signs of potential trouble for stock markets in late February, there was little indication as March began of just how chaotic things were about to get on that front.

Day after day, as governments and central banks put in place ever-greater emergency economic rescue measures, it seemed stock-market players were simply not in the mood to take on board any possible positives, in terms of the huge fiscal and monetary stimulus packages implemented around the globe.

This week has seen stock markets recoup relatively modest amounts of their huge losses. And it has been a relief to see something different from the precipitous falls in share prices in the context of hoping the eventual economic damage can be contained.

That said, it would be a brave person who tried to predict where things go from here, one way or another.

The economic forecasters are, for

good reason, highlighting the huge difficulties of trying to work out what the future holds. This is uncharted territory. The coronavirus pandemic is already the worst of its kind in living memory. The associated public-health measures have, rightly, been massive.

Professor Graeme Roy, director of the University of Strathclyde’s Fraser of Allander Institute, summed up the

scale of what has happened on this front: “The mothballing of our economy in response to the public-health emergency is unlike anything we have seen since World War II.”

Fraser of Allander has noted the global crisis has already triggered a “sharp economic downturn” in Scotland.

CIPS’s UK survey was compiled between March 12 and 20, ahead of the lockdown announced on Monday night.

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The earlier part of the month looks relatively normal compared with now.

Indeed, even when Chancellor Rishi Sunak stood up to deliver his Budget on March 11, which contained some big measures on the coronavirus front, there was no sign things were about to change as dramatically as they have in the two weeks since then.

The rapid escalation of the crisis necessitated further announcements, of huge loan support to help businesses and of dramatic measures to support people’s incomes, which will hopefully succeed in persuading employers in the worst-affected sectors and others to keep their staff on board.

The measures have been swift, and seem well-targeted. And Mr Sunak yesterday at last unveiled a major support package for the self-employed.

However, even with all these measures, the effect of the crisis on economic output in the second quarter will surely be dramatic, with so much having been shut down to protect lives.

Fraser of Allander, in its latest commentary published this week, contemplates whether or not we can hope for a V-shaped recession, and weighs factors that might mean an economic recovery will be much more protracted, taking months and possibly years.

The V-shape would obviously be by far the best outcome for living standards. We are already plummeting on the downstroke of the “V”, so the faster and sharper the subsequent upswing, the better.

However, given the scale of the shutdown and the likelihood that elements of it will last for months, Fraser of Allander has observed that a scenario in which a “return to normal” is “some way off into the future” is now a “more realistic assessment” of the situation we are in.

It highlights the weakness of the recovery that followed the 2008/09 recession, amid the huge austerity programme implemented by the Conservatives.

And the think-tank observes that real earnings in Scotland were, even before the coronavirus crisis hit, still lower on average than they were in 2007. That is quite a sobering thought.

It states: “The crisis comes on the back of three-and-a-half years of Brexit uncertainty, which has stalled investment and eroded confidence. UK growth in 2019 was just 1.4 per cent.”

Growth last year was little better than the 1.3% rate in 2018 – the weakest showing since the 2008/09 recession.

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Fraser of Allander points out the weakness of the post-2008/09 recovery means the resilience of the economy, individual firms and households “will

be tested”.

The huge immediate challenge remains the scale of the coronavirus crisis, amid uncertainty over how this will develop but grim signals from the likes of Italy and Spain of what may be to come.

Other considerations in assessing the likely speed of recovery include how long it will take for people who have lost jobs to find new employment, and the resilience or otherwise of businesses in terms of the numbers that will fail or struggle. Loss of employment also brings with it health and wellbeing costs, as Fraser of Allander notes.

One big question will be to what extent output lost from the economic shock of the coronavirus crisis will merely be deferred to a future period, as opposed to disappearing altogether.

The relative proportions of what is deferred and lost will play a significant part in determining the speed and strength, or otherwise, of the recovery.

The depth of the decline and speed

of recovery will, quite understandably, seem very much like secondary considerations to many right now amid fears for friends and family amid the coronavirus pandemic.

And the priority is absolutely the drive to minimise the death toll from Covid-19, backed by the great efforts of National Health Service staff and other key workers.

However, as well as hoping for the best while preparing for the worst in the front-line fight against coronavirus, it seems important to retain some optimism that the huge moves by governments and central banks to support livelihoods can limit the ultimate economic damage and negative effect on living standards very significantly.

It was heartening this week to see credit ratings business DBRS Morningstar highlight its view that most advanced-economy sovereign states had “adequate fiscal space to implement temporary measures to mitigate the adverse impact of Covid-19”.

It is easy to see why Fraser of Allander sees a more protracted recovery as more likely at this stage than the V-shape. However, the fact the pattern is still

up for debate may provide some scope

for optimism.

And it is crucial for employers, amid the tumult, to find the calmness to look beyond the current awful situation to a future, hopefully not too distant, when the worst of the coronavirus tragedy has passed. Those with deep enough pockets have the opportunity, should they so wish, to do the right thing by their staff with an eye on the future. Such behaviour would seem likely to bring rewards in time – employers should not underestimate the value of a loyal as well as experienced workforce. Similarly, customers are likely to remember how businesses behave at such times.

Obviously, what businesses can do and withstand depends on their financial reserves, and a long-term approach will often be easier for larger businesses, although this will obviously vary from sector to sector and from company to company. Amid the maelstrom, there have also been signs of smaller businesses, as well as larger players, pitching in to do what they can to help employees, customers, and in plenty of cases the wider fight against coronavirus.

The uncertainty about what the future holds remains huge, but it will be dictated by the actions of people, whether as individuals or as leaders of businesses or other organisations. And on this front there has been plenty of good work, in addition to some well-publicised shortcomings, in what we have seen so far.