Whether a V or U-shaped recovery, the economy is already off the bottom


Companies are beginning to ease back into action, but big questions remain for hospitality and leisure

Just about every letter of the alphabet has seemingly been used to characterise the range of possible trajectories for our epidemically bombed-out economy. Is it to be a V-shaped contraction and recovery, a U, an L, or even an I, where the economy doesn’t recover at all but continues in freefall?

Without knowing how effective governments have been in taming the virus, the answer can for now be little more than guesswork.

Yet despite the uncharted nature of our self-induced shutdown, there are perhaps already a number of pointers that can be offered.

One is that we have already almost certainly passed the nadir of the contraction. Notwithstanding the fact that the lockdown has not yet been lifted, there are multiple signs of the economy beginning to wake up: more cars and vans on the roads, more people on the streets, more eateries open for takeaways, and more offices and factories that having taken appropriate safeguarding measures are operating again, albeit at much reduced levels.

All this would suggest economic activity is very probably somewhat better than it was, say, two or three weeks ago.

But beyond this slight sense of an economy once more on the move, it is quite hard to make a more broadly optimistic case.

“Some time soon, we may be going back to work,” a BBC correspondent commented this week on plans to lift the lockdown, “but not to play”.

Unfortunately, quite a bit of our economy relies on play – hospitality, entertainment, travel and leisure.

Nearly 10pc of the UK workforce is employed in hospitality alone. It seems unlikely many of them will be going back to work any time soon.

Let’s take a case in point. Say you operate a London restaurant. It’ll have been closed now for two months, and will be among the last businesses allowed to reopen. When it does, the landlord will immediately require payment of at least some back-rent. Other creditors will also be hammering at the door for payment.

Continued social distancing measures after the lockdown is lifted will mean that at best, and for an indefinite period, only half as much business will be possible as previously, and that’s assuming that people feel comfortable with dining out in public spaces at all. In reality, the disease may have inflicted lasting behavioural changes.

What is more, tourism is inevitably going to be slow to return, and if the only way of keeping the virus in check is like New Zealand to close borders, then past levels of tourism won’t be coming back until an effective vaccine is found.

British Airways is probably right to think that it will be some years before airline travel gets back to where it was. In any case, it doesn’t take a genius to work out that the restaurant is going to be uneconomic against such a backdrop. There are tens of thousands of such hand-to-mouth businesses across the country, and they will not survive a two to three-year recovery.

Even assuming all the restrictions are removed, many of these businesses will still find themselves unviable.

Being able to reopen makes no difference if potential customers are too scared to congregate in public spaces.

There is a tsunami of redundancies waiting to hit the economy the moment the furloughed workers scheme, which has clocked up £8bn of costs so far, is withdrawn. The cost of the self-employed income support scheme, by the way, comes on top.

That level of support is plainly not sustainable for long. The economy, and the public finances, seem to have become trapped in a hole of the Government’s own making.

Having closed things down, the Government finds itself with few tools to get things going again. Even relentless central bank money printing doesn’t work if people are saving rather than spending it.

The big risk, as pointed out by Nouriel Roubini, the global economy’s resident Dr Doom, is that a bit like the Seventies, we end up with a nightmarish combination of lasting recessionary and inflationary pressures – stagflation, or as he puts it “stagdeflation”. He makes a compelling case.

The self-induced nature of today’s economic shock makes it very different from anything we have seen before, but that doesn’t mean the normal rules of economics no longer apply.

Faced with unemployment and/or reduced income, households would normally double down on the hit to demand by spending less and saving more. Similarly with the corporate sector, which in a downturn almost invariably seeks to pay off debts and cut costs, creating a downward spiral in both demand and supply.

Even firms capable of surviving the pandemic are likely to use it as an opportunity to restructure; many employees and places of work will find themselves surplus to requirements.

Further fuelling these deflationary forces are what Roubini calls “permanent negative supply shocks” – deglobalisation, decoupling between the US and China, Balkanisation of global supply chains, more restrictive trade and protectionism. All these things reduce potential growth and add to inflationary pressures, and while they also obviously pre-date Covid-19, the pandemic nonetheless gives them added impetus.

There are, however, alternative, more positive ways of looking at things. Unlike the health crisis, which is something imposed on us by a rogue virus, the economic crisis is something that we have largely inflicted on ourselves, and have been able to partially offset by monetising consequent, burgeoning fiscal deficits.

That gives some reason to hope that the economy can indeed be substantially fired back up again once the pandemic is over.

Nor is it obvious that a more self-sufficient economy which is less dependent on global supply is necessarily a worse one.

Roubini is surely right that it would be less efficient and therefore more inflationary, but it might also help to reverse one of globalisation’s more malign influences: an ever-growing share of capital and profit in the economy at the expense of labour. Some might think that a welcome development.