Despatches from an economy operatng at two-thirds of normal Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. It is a big and difficult question. How much is the economy being shut down by the lockdown? Is very little happening, as it can easily seem, or is quite a lot of activity happening alongside social distancing and a huge increase in the number of people working from home? How much below normal are we? And, as importantly, which I shall come on to, is it possible to increase the amount of economic activity that is taking place? Let me be clear, I am not about to join the ranks of the irresponsible, and advocate that we ignore the virus and carry on as normal
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Despatches from an economy operatng at two-thirds of normal
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
It is a big and difficult question. How much is the economy being shut down by the lockdown? Is very little happening, as it can easily seem, or is quite a lot of activity happening alongside social distancing and a huge increase in the number of people working from home? How much below normal are we?
And, as importantly, which I shall come on to, is it possible to increase the amount of economic activity that is taking place? Let me be clear, I am not about to join the ranks of the irresponsible, and advocate that we ignore the virus and carry on as normal for the sake of the economy. But there may be room for a bit of nuance in this debate, to gradually bring on stream some activities that have been suspended as a result of the government’s measures.
Let me start with the first question. How much below normal is the economy operating at? It is a question where the usual visual aids do not work. If you looked at the station car park not far from my home, you would conclude that normal activity has slumped by 90%, with just a handful of cars where it is normally packed out.
There are, of course, good reasons for that, as there are for the slump in all forms of transport in recent weeks. So I am indebted to the economists at the Centre for Economics and Business Research (CEBR) for an innovative attempt to estimate just how much is being lost at present.
Gradually in coming weeks more statistical information will emerge, though it will be harder for the Office for National Statistics (ONS) and others to collect the normal run of data as a result of shutdown measures. We know the second quarter of the year, which has just started, will be awful for the economy, but it will be a while before we know just how awful.
The CEBR’s approach, carried out by economists Daryn Park and Owen Good, was to look at the nearly 100 detailed sectors of the economy, on the basis of the standard industrial classification, and assign each a score. For some, economic activity was continuing as normal, with most employees still in work. For many others, most workers had been sent home and were still working, and were reckoned to be "producing" at 90% of normal. A final category was where workers had been sent home and, by nature of their job, were not producing anything.
After looking at whether the sectors could produce, they then did a separate analysis of whether at present there was likely to be any demand for the sector’s products. Their final estimate of the sector’s lost output took both production constraints and the likely change demand into account.
The results showed sharp differences in the scope for different sectors of the economy to carry on at anything like normal. Most sectors are on track to lose a significant proportion of normal output, though a small number; healthcare, pharmaceuticals and food retail, will do more than usual.
The broad results, taking aggregated sectors of the economy, are that during the lockdown the percentage of output lost will be 14% in agriculture, 60% in mining and quarrying, 69% in manufacturing, 10% in electricity and gas supply, zero in water and sewerage, 50% in construction, 58% in wholesale and retail, 39% in transport, 79% in accommodation and food services, 7% in information and communication, 18% in finance and insurance, 20% in real estate, 10% in professional and scientific activities, 46% in education and 81% in arts, entertainment and education.
Adding all these up, and weighting by sector, produces the result that the economy is currently suffering a loss of output of 31%, and is thus operating at 69% of normal levels. That does not mean we will see a 31% drop in gross domestic product in the current quarter – most forecasts are for around half that – because some of the weakness had already set in during March. But it gives a good idea of the kind of economy we have now.
Though the streets are quiet and most people are staying at home – National Express will suspend all its coach services from midnight tonight – something is still happening. But that something is well below normal, to an extent that none of us have seen before. Even in the three-day week in the early weeks of 1974, the economy did not operate this far below normal.
Interestingly, the CEBR results are similar to those produced by INSEE, France’s national institute for statistics and economic studies, which estimates that its economy is operating at 65% of normal because of coronavirus lockdowns.
That something highly unusual is confirmed by other evidence, including nearly a million new universal credit claimants since the lockdown began. The Bank of England’s decision-maker panel, based on responses from 2,500 businesses from a panel of 8,000, showed that 71% expect lower sales over the next 12 months as a result of Covid-19, with most of these expecting a drop of more the 10%. The results of the survey, carried out last month, got progressively gloomier as the month progressed.
The ONS, for its part, surveyed more than 3,600 businesses during the first three weeks of March and found that 27% were planning to cut staff and 45% were experiencing lower than expected turnover. The British Chamber of Commerce’s business impact monitor found that 44% of firms which responded were planning to “furlough” at least half of their staff, taking advantage of the government’s job retention scheme, which will pay 80% of salaries, up to £2.500 a month.
This is where it gets interesting. As a new collection of essays from the Centre for Economic Policy Research shows, not be confused with the CEBR, the chancellor’s approach to the crisis is a textbook one. We are, as the collection’s editors, Richard Baldwin and Beatrice Weder di Mauro write, in a recession that is “a medical necessity”. The key is to prevent a medical emergency that should be temporary into a longer-lasting economic emergency, a depression. The answer to this is to prevent as much “economic scarring” as is possible. A rise in unemployment is inevitable, the question is whether it cam be contained and then reversed as the economy recovers.
This is where policymakers will have to box clever. If we look at the amount of economic activity that has been shut down, much of it, in hospitality, retailing and entertainment, is inevitable for public safety. But garages and DIY stores were allowed to stay open under government rules, though many have closed, including the bigger chains
For years we have observed the rising trend of online sales and the threat to the high street. This crisis has proved, however, that high streets were necessary all along and that, faced with a sudden surge in demand, online retailers could not cope. Some did not try.
Many firms which have stopped operating and furloughed their employees would say they are doing it with the interests of their workers uppermost. I am sure this is true for many. Others, however, will have seized the government’s job retention scheme with open arms. The Institute of Economic Affairs, a free market think tank, suggests that the Treasury scheme may give some businesses the wrong incentives, making it too easy for the government to pick up their pay bill.
The response, led by the chancellor Rishi Sunak, is the right one. What it must not do, however, is prevent the economy from getting back to normal. Social distancing measures will need to be in place for a long time, as will a far higher proportion of people working from home.
There is, however, plenty to be learned from the successful social distancing methods used by the supermarkets and other food retailers, and by businesses which are making a success of distance working. The lockdown will have to be eased, as the former Bank of England governor Lord King said the other day, and the economy cannot operate on two-thirds of normal for too long. A gradual return to some kind of normality will be needed, though not for a few weeks yet. It is important that policy does not get in the way of that.