It isn’t a prize any country would have wanted to claim. But tomorrow it should unfortunately be official. Of all the major economies, the UK will have suffered the worst slump in output during the second quarter of the year. Our GDP is expected to have shrunk by a terrifying 20pc, or possibly slightly more, from April to June, almost double the rate of some of our closest competitors. It is catastrophic.
Sure, there are reasons for that. Our consumer-led retail, leisure and services based economy was always likely to be especially hard hit by an epidemic, and the disease spread more rapidly in the UK than in many comparable countries. And yet one point is surely obvious. If we suffered a worse slump than anyone else, we need to engineer a swifter recovery.
Like how? We need to end lockdowns as fast as possible; we need to tackle unions blocking a return to work, especially in the public sector; we need yet more stimulus, even if it means more debt; and we need to liberate the economy to create more jobs. For a couple of decades, Britain has outperformed its main peers, but if we don’t make up the ground we have lost in the last quarter very quickly, we will have thrown away years of hard work.
When the official figures are released tomorrow morning, they are not going to make pleasant reading. In its forecasts last week, the Bank of England indicated it expected second-quarter GDP to shrink by 23pc year on year and 21pc against the first quarter.
It might be out by a percentage point or two. But we are still going to be the Norwich City of the major industrial economies, adrift at the bottom of the league table. For a comparison, GDP shrunk by 13pc in France, 10pc in Germany and 9.5pc in the United States.
Only Spain comes anywhere close to our figures. with an 18pc plunge, while Sweden, with its light touch lockdown, escaped with only an 8.6pc fall. Whichever way you look at it, it is a terrible outcome.
There are reasons for that. An economy driven by leisure, retailing and services, and buoyed up by consumer debt, worked surprisingly well for the last 20 years. But it was always going to be uniquely vulnerable to a highly infectious epidemic.
A manufacturing, export based economy – such as there is in Germany for example – was likely to get through this in better shape. With social distancing in place, and with plenty of robotics, it is a lot easier to keep a factory running than a nightclub. But if we have the biggest drop in output, we also have to create the swiftest recovery. So how can we make that happen? Here are four ways we could start.
First, we need to ease lockdowns as quickly as we possibly can. There isn’t much difference in infection and death rates between the UK and Sweden, but there is a heck of a big difference – more than 10 percentage points – in the impact on GDP. True, we need to control the spread of Covid-19, but we also have to make sure there is still a viable economy when this is all over. With localised lockdowns, better testing, and more tracing, as well as shielding for the most vulnerable groups, we should be able to keep the rate of infection under control without shutting down the entire economy.
In so far as possible, we need to bring shops, offices and factories back to life, and the gyms, beauty salons, nightclubs and theatres should not be far behind. It is the only way that the economy can bounce back.
Secondly, we need to curb the power of unions obstructing a return to work. It is very easy to complain about heath and safety, especially in the public sector, and there is no one who argues against extra measures having to be put in place to control the spread of the virus.
But teachers have been far too slow to adapt to dramatically changed circumstances, and so have many other highly unionised professions. It is not just the unions either. One survey last week found that the British were more reluctant to go back to the office than workers in any other European country. Management needs to make sure that changes as well.
Thirdly, it looks as if we will need even more of a fiscal boost. The Office for Budget Responsibility estimates the UK’s stimulus at 5.9pc of GDP. That compares with 14pc for the US. If GDP is down by 20pc, we should be looking at a budget deficit of a similar amount to make up the difference.
We may well need some form of helicopter money to keep demand alive: in effect Donald Trump has already taken that step with his stimulus cheques and the suspension of payroll taxes. We could easily suspend National Insurance, and cancel student loans repayments, if we wanted to. It will be expensive, but it will be worth it.
Finally, we need a wave of deregulation. We are already loosening planning laws and spending more on infrastructure. But hi-vis jackets and JCBs can’t rescue the economy by themselves. We need to simplify the tax system; loosen employment regulations; create the world’s most flexible regulatory regime for new technologies; and, perhaps most of all, turbocharge the gig and hustle economies because that is the only place the two or three million new jobs we will need to create in the next year will come from.
The UK has done well against the rest of Europe over the last two decades. Overall growth has been better than most of our main rivals since the launch of the single currency. And yet if we cannot recover very quickly from a disastrous 2020, we will have thrown away years of competitive gains – and it may take a generation or more to recover the ground we have just lost.