Slumps, supply chains and solutions Top of the Charts 12 June 2020 Torsten Bell Afternoon all, Happy “the economy’s shrunk 9 times faster than it ever has before” day. I’m sure we’re all grateful to the ONS for getting Friday off to such a perky start with the GDP stats out this morning. The nation’s official statos even made an animated chart to ram home the point that we’re not just taking TV shows about hotels off air, we’ve shut them all down in real life. In fact the whole economy’s Fawlty*, which is why this week’s reads focus on what we’ve learnt about this economic crisis three months into it. Hope they’re of interest to you as they were to us. As ever get in touch if there’s anything you’d like to see more/less of in TOTCs. Have a good weekend, Torsten Chief Executive Resolution Foundation *Sorry. Trading up down. The UK economy is getting hammered, but what about the global economy and trade in particular? A useful Bank of England blog offers up a summary of emerging thinking. It points towards a bigger hit to trade than during the financial crisis, because not only is demand for traded goods down, but the supply shock element of this crisis is spreading through supply chains, i.e. companies can’t source inputs they need. The existence of global supply chains is also a clear route by which the economic hit of this crisis would have spread between countries, even if the virus itself had not. Korea for example relies on China for inputs that make up over 16 per cent of its manufacturing output, and daily imports from China to the US were roughly 50% lower in March 2020 compared to March 2019. This is another reason why we care about avoiding a second wave not just in the UK but elsewhere too. Slumping globally. The financial crisis gets called the Global Financial Crisis – but this is the first truly global crisis of the 21st Century. That’s the main takeaway from the World Bank’s Global Economic Outlook (summary), which says that most countries will enter recessions in 2020 with per capita income falling in the highest proportion of countries since at least 1870. Advanced economies are projected to shrink 7 percent, but this is a genuine pandemic so emerging and developing economies are also forecast to contract by 2.5 percent (their worst growth performance in at least 60 years). While rich countries can afford to protect their citizens against these initial income hits, citizens of many poorer countries have to face both the health and economic effects of this pandemic with far less support. A sobering report but an important reminder that, while the experience of the US and Europe dominates news coverage of this crisis, its impacts go much wider. Where next? As countries start to move from the depths of the economic shutdown, how should policy evolve? That’s the question asked (and in some areas answered) by a valuable new briefing from our friends at PIIE in Washington. The general argument is that policy now needs to pay more attention to how to help drive a strong recovery – and in particular to how the adjustment of people and firms to some sectors shrinking and others growing takes place. What are their answers? Wage subsidies, helping to pay wages of those going back to work in particularly hard hit sectors, guaranteed loans to firms and clear routes to restructure SMEs who have built up excessive debt from the crisis. These are important contributions to difficult policy challenges. We’ll be offering our own views on these same questions in two papers in the next few weeks. Mental health. You should read important research from our friends at the IFS this week. It shows significant deteriorations in mental health over the first two months of lockdown. The effects have been more acutely felt by young adults and women, increasing inequality of mental health outcomes because both groups had worse mental health to start with. These are very important findings and mustn’t be ignored while we deal with the more visible health challenges the pandemic brings. Home economics. We now know schools aren’t reopening anytime soon, so lots of you have home schooling hours to fill. In solidarity TOTCs offers you the Bank of England’s go at how to teach young people about how money and the economy works. Before you get anxious about economists trying to teach kids anything, it was created in partnership with the Beano lot so should actually be of some use. Good luck. Even if the children don’t learn anything, maybe we all will. Chart of the Week This week’s chart engages with one of this crisis’s most important questions – who is shouldering the pain of this economic shock. You knew already (if you’ve been paying attention) that among workers it is the lowest earners who have been hardest hit: one-third of lower-paid employees have lost jobs or been furloughed vs under one-in-ten top earners. But what about the impact on family budgets in the round? That’s the question new Resolution Foundation research focuses on, by looking at changes to household incomes and spending. The answer is… a bit complicated. The hits to family incomes are much more evenly spread across rich and poor households than the labour market hits are between low and high earners. Partly that’s because this is a labour market crisis and poorer households have fewer workers in them, and partly it’s the crucial cushioning role of the social security system protecting lower-income families from earnings falls. But that doesn’t mean family budgets are under equal pressure: when we look at spending it’s clear that richer families have seen MUCH bigger falls in outgoings than poorer families (in part because they have more non-essential spending to cut). The combination of these trends is, as this week’s chart shows, more than two-fifths of higher-income working-age families actually experiencing strengthening household budgets, compared to less than a fifth of lower-income ones. This kind of broad view of living standards is essential for policy makers considering where support in the recovery phase should be focused.