Covid could still make a mockery of the best-laid economic plans


The last 18 months haven’t been normal. You’ll have noticed. But while it’s blindingly obvious in our personal lives, we’ve struggled to recognise it when thinking about the economy.

All downturns are different, from their causes to their depths. This is a challenge for policy makers prone to looking back to previous recessions for clues when a new one hits. As a Treasury civil servant during the Financial Crisis we all expected unemployment to surge to 3 million, because it had in the 1980s and 90s recessions. But it didn’t get close with employment falling just half as far as it had in the 1980s. Earnings surprised everyone by plummeting instead.

But if all economic crisis are different, this one is more different than most. First it has a unique cause: a virus rather than the usual economic policy failure or shock. That’s meant behavioural changes to reduce social contacts, not a textbook collapse in confidence, have driven spending shifts. Our holidays were banned, not cancelled because of fears we couldn’t afford them.

Second, as a result the fortunes of different sectors have varied much more than in previous downturns and recoveries: as restaurants closed Amazon spending surged. And these ups and downs happen much more quickly than normal.

Lastly this is a genuinely global crisis. The 2008/9 ‘Global Financial Crisis’, was actually a pan-Atlantic meltdown. In a normal year around 10 per cent of economies see their GDP fall and even in 2009 fewer than half did. In 2020 however 8 in 10 countries saw output falls, fully justifying the ‘pan’ in pandemic.

So pandemic economics are far from normal. Understandably we struggled to recognise that in the scary days of March 2020. Some called for universal cash handouts – a policy that makes more sense in a normal recession but is a really poor way to protect the incomes of those whose jobs the pandemic threatened. You don’t help waiters losing their jobs by giving everyone money to spend: it can’t be spent in closed restaurants. The government was right instead to create the furlough scheme.

But they were generally wrong in failing to recognise how different the crisis was for different parts of the economy. Support for the self-employed paid too little attention to how much income people had lost: hundreds of millions went to people who had lost nothing. It also took a year of the crisis to pass before the Chancellor recognised the need to treat sectors of the economy differently. Having initially wasted grants on booming supermarkets he eventually focused them on the hard hit hospitality and leisure sectors in the second wave.

More problematic were the big mistakes of last autumn. Despite cases clearly rising, lockdowns were delayed and plans for scrapping furlough in October maintained until the very last moment. Wishful thinking from the Chancellor and Prime Minister meant they believed they were in charge of the path of the economy when the virus very much was. Widespread projections of a V-shaped recovery at the time seem laughable once you recall we didn’t even know for sure if vaccines worked.  The kind of optimism bias on display might have some silver linings in a normal recession, where there are feedback loops from confidence to economic outcomes. But it’s a disaster in a pandemic when it just delays the inevitable lockdown, costing lives and GDP.

And just as the economic downturn from a pandemic is unusual, so is the recovery. Which helps explain why we’re currently hearing a tale of two recoveries. One day you’ll hear news reports of a brilliant bounce-back, record numbers entering work and GDP coming in much stronger than expected. The very next you’ll see panicked headlines about the recovery being held back by malfunctioning supply chains or dangerous inflation.

But excessive optimism and overblown pessimism should both be kept in check. This bumpy ride might not be normal, but it is exactly what we should expect given the unique pandemic economics. The big picture here is that demand has surged back, but supply remains a mess. It’s the other way around in most recessions, but most recessions don’t involve turning large swathes of global capitalism off and on again.

Shutdowns of the economy last year mean stocks are running low, most famously of semi-conductors. Being part of a global economy normally reduces supply risks, but when so many countries are experiencing the same shock the opposite is true.

We need to stop judging the labour market by normal standards. Yes there are record vacancies, but that doesn’t mean firms are finding it impossible to hire as we’re regularly told. In fact, hiring is at record levels too and over 1.5 million workers are still on furlough. Getting millions of people back to work once you reopen an economy just takes time: it’s a quicker decision going for a meal in a restaurant than taking a job in one.

In a normal recovery sectors grow together, but reopening means reversing some of the big behavioural changes of the last 18 months. Some industries that boomed in lockdowns actually need to shrink: there’s a reason why retail sales have declined in recent months.

We should plan for this bumpy ride to continue. Who knows what will happen to hospitalisation rates as schools reopen, but they are stubbornly high now and there’s no guarantee of an easy Autumn ahead. The public gets this (over a third of us think a return to normality is still a year away) but policy makers need to yet again recognise the virus is in the driving seat. In the US the huge fiscal stimulus has been too frontloaded – now tapering out just as the Delta wave bites. Here in the UK, government has set out no plans for how it will deal with a difficult autumn. This isn’t about lockdowns, but if the NHS is threatened again the return of some limited restrictions and targeted economic support will be needed.

We’re eighteen months into this crisis. On the economic side of things we’ve all had swift learning to do. Relying on what we’re used to seeing in downturns and recoveries past isn’t much of a guide because this time – to butcher the Clinton 1992 campaign mantra – it’s ‘the pandemic stupid’.

This article was originally published in The Times.