When the UK Chancellor Rishi Sunak announced his economic intervention at the beginning of lockdown, the buzzword he kept reaching for was “unprecedented”. They were “unprecedented measures for unprecedented times”, he reminded the British public. His choice of word, if repetitive, was not insignificant.
Some of the figures being used to explain the current financial crisis are mind-boggling. In the second quarter of this year, the US economy shrank by 32.9% – a huge loss, bigger than any decline on record. France, Italy, Germany, Spain; almost every major economy has also seen a big drop in gross domestic product (GDP) at the start of this year. In the UK, in April alone, GDP shrank 20.4% and is on track for the biggest decline in 100 years. By comparison, during the Great Recession in 2008 UK GDP decreased by no more than 1% in a single month
Meanwhile some economists remain upbeat – predicting speedy “v-shaped” recoveries. How can it be that they think the worst economic performance on record is not such a big deal?
GDP doesn’t tell the full story. When the economy tanks, it’s the other things that really hurt – the small businesses that have to fold, taking their owner’s life savings with them; the graduates forced to abandon their dreams, and get an office job instead; the families left trapped with a mortgage to pay and no way to sell their house; the people dealing with the stress of not knowing how to pay their bills or being able to visualise a future. And when it comes to this human cost, all recessions are far from equal.
What makes a recession “good” or “bad” is who it affects and how badly it affects them.
In the last three decades, a recession has come and gone somewhere in the world every couple of years, according to the IMF. “[Recessions] are always looming,” says Caroline Bentham, a PhD candidate at the University of Leeds, UK. Countries like the UK, US, France and Germany have had two or three each since the start of the 1990s. But other advanced economies like Italy, Japan, Portugal and Greece have reached half a dozen “recession episodes” in the same time. Globally, economies are in recession 10-12% of the time. Economic booms are also equally frequent.
While they are relatively common, they are also hard to predict. The same working paper from the IMF found that private sector and official state economists were equally bad at predicting recession years. The authors put this down to a reluctance from economists to read good or bad news correctly. “At the moment everyone is sort of smiling at each other and pretending that we’re not in a recession. They’re thinking, ‘Let’s hope we can get out quick when it happens’. But it is hard to tell at the moment because we are in the eye of the storm,” says Bentham.
Good or bad?
Bentham previously worked at the Bank of England and before that at EY, one of the “Big Four” accounting firms, where she worked on tightening regulation to make banks more resilient in direct response to the 2008 financial crash. She says that banks are much better set up to handle a financial crisis than a decade ago. “Central banks have learned that when there is financial sector turmoil they step in with liquidity, cheap funding, to shore them up,” she says.
But not all recessions are the same. “The 2008 recession was about the housing market and shares, which hit disproportionately higher income groups,” says Carol Propper, a professor of economics at Imperial College London. “At present the crisis seems to be hitting very much the lower income groups; the vulnerable workers, young and less skilled. This looks like the late-70s, early-80s recession, which affected young and unskilled workers. What we know about those workers is that coming into a labour market has long shadows for those vulnerable workers, but not for skilled workers. It affects the whole life-long trajectory for those unskilled workers in the labour market.” So while the financial sector might be better off in this recession because of the lessons learned a decade ago, the least wealthy people might suffer much more.
There are other lessons from 2008, too. Despite the impression that recessions lead to significant numbers of job losses, this isn’t always the case. People who were laid off in the Great Recession were unemployed for a long time but layoffs were concentrated among a small number of people. The drop in hiring was much steeper than the number of layoffs, making it difficult for the unemployed or recent school-leavers and university graduates to find a job.
Unemployment in the UK rose 2%, in the US 3% and in the Eurozone by 4% during the Great Recession. In the UK and US, unemployment had dropped to below pre-recession figures by 2014, meaning fewer people were out of jobs as those countries came out of the crisis than before they went in. In the Eurozone, employment statistics took much longer to recover. In Germany, employment went up over this period but on average across the whole zone it stayed fairly constant – this is in part due to migration. Countries performing better economically, like Germany and the UK, could attract workers to bolster their labour markets.
What is noticeable about this recession is that far more workers are going to be in a vulnerable position if social-distancing rules remain in place long term.
Why has GDP been hit so badly?
A drop in GDP was expected during lockdown. While shops and businesses were closed, the total value generated by goods and services decreased. This has the knock-on effect of the people employed by those businesses earning less money – either a fraction of their salary or nothing at all if they were made redundant.
At its peak, almost nine million people in the UK – about a quarter of the total number of people in work – were furloughed, meaning the government paid 80% of their salaries with their employer choosing whether to top the rest up or not. Other countries, like France and Germany, have similar state-backed furlough schemes, while in the US furloughing is decided on a company-by-company basis.
This means that many millions of people might only have been earning enough money to cover their essentials, with little left to spend on luxuries – and even if they did want to spend money elsewhere they could only do so at businesses that had online shops.
In some cases, US workers might find themselves earning nothing at all while furloughed. The justification is that it is easier for a company to get up and running quickly with trained staff ready to go than it is to retrain new staff. Furloughed staff might prefer the promise of their old job back than to be made redundant and to enter a challenging employment market.
These furlough schemes will also shortly be coming to an end, meaning employers will have to make a decision about whether to lay off employees permanently.
“No one is saying the economy has not been hit, it’s just the losses are not yet crystalising,” says Bentham. “People are taking mortgage holidays, credit holidays – it just means the losses are being pushed further down the road. But it will hit. Eventually the financial sector bubble of confidence will burst and we will see real turmoil again. In six-to-12 months the financial sector will catch up.
All shops, restaurants, bars, museums and cinemas in the UK were given the green light to return to business from 4 July. But it isn’t as simple as opening the shutters and welcoming customers back. Cinemas, for example, need to draw customers in with blockbuster movies. But film distributors are holding their cards close to their chest.
If you’re the distributor of a massive summer hit it makes sense to wait to see how much appetite there is from movie-goers before releasing your film. Or to wait for social distancing rules to relax so that cinema capacities can increase. Distributors of films like Tenet are pushing back their release date, while Disney announced that their summer blockbuster Mulan would be released on their streaming service, which means cinemas are holding off opening – with no big attractions to ensure seats are filled.
This catch-22 is repeated all over and perfectly describes the difference between supply shock and demand shock.
Supply vs demand
Demand shocks happen when demand for products drops as people stop earning money. “In this case, stimulating the economy is good because the problem is lack of demand,” says Veronica Guerrieri, a professor of economics at The University of Chicago Booth School of Business. This is exactly the tactic used in previous recessions – including quite successfully in Australia in 2008: give households cash and encourage them to spend it to kickstart the economy.
“But currently the problem is not only lack of demand, it is a lack of goods because businesses have stopped working,” says Guerrieri. This is a supply shock. “So if you give people more money businesses increase their prices and it will lead to higher inflation.”
Lower inflation is usually a good thing for people who hold onto their jobs in a recession. It increases their purchasing power. Inflation is currently 0.65% (dipping as low as 0.12% in May) in the US and 0.8% in the UK, much lower than in recent years, but this could change should the governments’ stimulus packages cause supply shocks.
Supply shocks, by contrast, happen when people still have money to spend but cannot do so, because shops are closed or prices have rocketed up. For example, when oil prices go up, the cost to produce products manufactured with oil increases, and those costs are passed onto the customer.
Because the current recession is such a complicated mix of supply and demand shocks brought about by furloughing and suspending work in certain sectors, but not in others, it’s harder to predict how government interventions will work based on previous recessions.
“This is why people were debating whether expansionary policy would be good or not,” says Guerrieri. “There are some sectors where the virus has hit very heavily. You can increase demand but it will not give more incentive for waiters to go to work or increase the likelihood of customers going to a restaurant.”
Where are the opportunities?
Hardened by the effects of the last recession, central banks around the world have committed to stimulus plans worth a total of $4tn (£3.07tn) in the form of injections of liquidity and “quantitative easing”, as well as lowering interest rates. Germany’s central bank has committed 20% of GDP, the UK 15%, the US 10% and Spain 8%.
Bentham, a heterodox economist who considers herself someone who questions the mainstream and looks for more socially focused answers, says that now is the time to fix parts of the economy we don’t like as part of the recovery. “As a woman, things like childcare, caring for sick relatives and lack of funding for social services is a massive drag on the productivity of women. We could reimagine what investment is by building the recovery around services that will improve the productivity of neglected people.”
“We have spent the last hundred years or more thinking the economy is great,” says Bentham, “which we have seen is not true. Money doesn’t trickle down from the top making everyone richer.”
Bentham gives the example of New Zealand’s recovery plan, which references the country’s high rate of incarceration, teenage suicide and the inequality faced by Maori people. “The Covid-19 recovery creates a once-in-a-lifetime opportunity to address these inequalities [by reforming the economy],” reads the report.
“New Zealand is making really good progress in terms of not assuming that economic growth means everyone gets wealthier,” says Bentham. “They’re saying ‘Let’s measure it on the basis of human wellbeing and welfare’. This goes back to Aristotle – the economy being about gaining the resources to live a good life and flourish. In their normal lives people are so busy earning money they don’t stop to think what they are earning money for.”
“Clearly one of the things Covid has done is it really exposed the inequality fault lines that exist,” says Propper, who is also the president of the Royal Economics Society. “Partly because individuals that are poorer are more likely to suffer ill health and also work heavily in healthcare.”
The recession might also present an opportunity to take meaningful action on climate change. In June, Germany announced a €130bn (£117bn) recovery plan, one-third of which has been specifically set aside for green investments. Compare that to the plans announced by the governments of the other 50 largest economies; on average 0.2% of their recovery plans will go towards green industries, according to an analysis by Bloomberg.
The idea of greening the economy in a recovery is not new. Former US President Franklin D Roosevelt’s “New Deal”, the recovery plan from the Great Depression, encouraged the expansion of US National Parks recognising their importance for people’s wellbeing. However, there was also a huge emphasis on road building – something that provided masses of jobs but can hardly be considered green.
“One of the good things about greening the economy, these projects are labour heavy,” says Propper. “Not building wind turbines, but retrofitting houses and redesigning city centres, those kinds of jobs are very labour intensive so they employ lots of people who can learn skills. Plumbers, housebuilders – all of those are useful and transferable skills.
“That, I think, is grounds for optimism,” she says. “Stopping global economies has made governments think about recovery with a green agenda.” Propper warns, however, there needs to be more than lip service paid to addressing inequalities and green industries.
There are opportunities to right wrongs in the economic recovery – the question is how the world’s leaders will choose to act next.