Jeremy Peat: 'It is nigh on impossible to consider in any detail how severe the impact of this enforced stagnation may be'

Given these known unknowns, it is nigh on impossible to consider in any detail how severe the impact of this enforced stagnation may be; nor how soon and how fast ‘recovery’ should be anticipated.

Inevitably a good deal of economic modelling is underway. However sound the models and capable the modellers, this activity must be close to useless until there is a sound foundation upon which to base a sensible central scenario and identify the key risks.

As matters stand, forecasts for even the next twelve months are based upon pure guesswork. These highly skilled economists would be far better employed attempting to identify the key impacts and how these could develop. They should be considering qualitatively rather than quantitatively the key issues influencing the outlook as and when economic life can be permitted to re-start. Thoughtful qualitative consideration would be of much more potential value to those charged with policy thinking than any number of spurious forecasts for gross domestic product and the like.

Thus far we know that many sectors have been severely affected. Critically retail sales and consumer expenditure more widely have slowed sharply. This is wholly unsurprising given the combined effects of constraints on supply and demand. On the supply side many shops, cafes, pubs, etc. are closed and access to those remaining open is seriously limited. Demand has been hit hard, with consumer incomes down following furloughing or unemployment for many. Additionally uncertainty is pervasive even for those remaining in jobs, while the value of capital assets and pension provision has fallen significantly and remains at risk.

Business investment, which was already at record low levels in the UK and Scotland, has effectively ceased. Businesses in many sectors will have lost a very high percentage of their revenue, with little prospect of being able to reduce costs to the same extent. Debts will be mounting and for some Government or bank loans may be seen as simply putting off the day when those debts have to be faced. Banks are already warning of the risks of mounting bad debts. The struggle will be to survive not thrive.

The longer that the lockdown and associated impacts continue the worse the effects will be on households and businesses. For households unemployment will be an ever increasing risk. Furloughing or redundancy will reduce savings or increase household debts. For businesses closure will be an increasingly likely option; or for the lucky ones total suspension of all activity until goodness knows when.

There will also be major impacts on the public finances. The support for furloughed staff, businesses, etc. has been essential. However, this involves a massive cost to the public exchequer. Extension of lockdown – or a return to lockdown if a second virus wave materialises – would mean that these costs grow once more. Already we anticipate Government debt as a share of GDP reaching its highest ever peace time level. Governments and central banks are thus far seen as prepared to live with such debt, and subsequently with much higher than ‘normally’ desirable levels of annual deficit, until the economy returns to growth. But there must be limits; and we must be close to these.

Even under the most optimistic of scenarios regarding the progress of beating off the virus, tough choices will be required on both Government expenditure and revenue-raising. For businesses, scarce public sector funds would be best deployed to first support and then assist recovery in vital but badly affected sectors. Similarly the priority for those scarce funds should be helping out those in the lowest income groups, to minimise the increase in bad debts and to best boost consumer demand. Banks may be understandably reluctant to lend to businesses or households unless public sector support is available. They will need some combination of encouragement and support.

We should not expect to see some dramatic bounce back involving super-normal levels of expenditure on retail items, holidays, eating out, etc. to compensate for purchases, trips abroad and pub meals or fine dining missed during the pandemic. It will be relatively good news if we get back to the ‘old normal’ in such sectors within six to nine months. Confidence will have been shot and uncertainties will continue for a fair period of time.

Government’s role will be critical and, as stressed above, Government funds will be a remarkably scarce and immensely valuable resource. To limit the extension of inequalities and secure growth, an increase in Government revenue is likely to be required. The key targets for revenue generation should be those who have suffered least during the crisis (or even benefitted) and those who can best afford additional tax on income and/or wealth for a limited time period.

One further point is that those businesses which do re-emerge will have reviewed strategies and have considered different ways of working, with differing skill requirements. There could even be scope, dare one hope, for a one-off boost to productivity. That will imply new or extended skill availability and again Government involvement will be essential. Policy may need to focus for a while on skill development and supporting innovation in existing and recovering businesses rather than new ventures with uncertain futures.

Finally, from a policy perspective it should go without saying that 2020 and 2021 will not be the time for a hard Brexit, or for a further independence referendum. The focus has to be on extracting ourselves from the Covid19-induced mire. Will our politicians see that this makes sense?