Guest commentary: call for “unorthodox, unlimited and urgent” policy to stop COVID-19 from causing a terrible and lengthy recession by Dr Gerard Lyons
There are many reasons to be constructive about the government’s economic approach to this crisis. However, they need to do more and soon. Economic policy needs to be unorthodox, unlimited and urgent to prevent a deep, long and damaging recession.
The US is ticking all the boxes in terms of its economic approach – giving cash payments to many Americans and immediate help to firms, while the US Federal Reserve has stated there will be no limit to how it might use monetary policy. The UK and many other European countries are not.
The Chancellor, Rishi Sunak, has already unveiled four fiscal packages. He initially described his policies as timely, targeted and temporary. However, Sunak was missing one ‘t’ – titanic. The scale was not big enough. He responded, focusing more money on firms, the employed and self-employed.
The Chancellor then called his policies coherent, coordinated and comprehensive. Trouble is, the polices were better described by another ‘c’ – complex. This was particularly so for small firms and the self-employed that needed help. Faced with a collapse in demand and no income for perhaps three months, there was a need to get more money to these groups quickly. He has only partially succeeded. I still don’t think the scale of the hit to the economy is appreciated fully. Firms don’t need more debt. They need grants and more support from the banks.
The Bank of England has cut rates to 0.1% and has printed money on a larger scale through quantitative easing. I think the Bank also needs to do more – on ‘regs’ and ‘pegs’. I would like to see an easing of many micro and macro prudential regulations. The Bank could also control the yield curve and peg 10 year rates at zero, as the Fed did after the Great Depression and the Bank of Japan has in recent years. UK rates need to stay low for long – and they will.
The scale of borrowing we are now seeing is not evidence of a magic money tree. Far from it! UK debt to GDP is around 80%. It will likely go above 100%, a peace-time high. But the national debt is there for a reason. To get us through tough times. After the Second World War it was about 240% and then came down steadily, but it took time. This increased borrowing can be funded easily and the Bank of England should also buy more of it, increasing their holdings of government debt.
The core of the UK’s financial system is safe, as the banks are heavily regulated, and many parts of the City have embraced fintech and are thus quite nimble. However, there are swathes, from law to commercial real estate, that have been hit hard. Economic shocks on this scale can often have unintended second-round effects that last a long time. Low yields may expose pension funds. Many people will have to rebuild savings and firms restore balance sheets.
It is important to appreciate the scale of the collapse in demand, income and trade. The world economy has been hit by the biggest economic collapse since the 1930s. It is not yet clear how deep the recession will be. The best way to think about this are the shapes of the letters L-U-V.
Only a few weeks ago, the financial markets thought that the global impact of this crisis would be like the letter V, because the virus was concentrated in China and Asia. Their economies were expected to rebound strongly after collapsing at the start of the year. Then, the virus spread.
Now, the current thinking – which seems right – is the letter U will describe events. The US, UK and European economies have already collapsed, will be in recession in the second quarter, weak in the third, and then recover before year-end, helped by policy. There is, however, a genuine fear that ‘L’ might better describe prospects, where the recovery is delayed as a slump beckons. This could either be because the policy response fails to save enough firms or the health crisis persists.
It is only when we are past the worst on the health front that we can be truly positive about the economic outlook. Although there is still considerable uncertainty about this virus, longer-term investors are focused on some encouraging signs. Already, globally, there are now 23 treatments for this virus in human trials, 41 regulated authorised diagnostic tests and even five vaccines in human trials. This is at rapid speed and has raised expectations of a vaccine by next winter, although I have my doubts as to whether this can be mass produced by then.
In coming weeks, attention too will turn to whether the lockdown can end. A lockdown is necessary to limit the spread of the virus and save lives, but it is not feasible or practical to prolong it for too long. A long lockdown will wipe out large swathes of the economy. Ideally, we would test everyone before ending the lockdown, but that is not credible. We should thus expect plans to be put in place for the lockdown to be ended in a gradual and phased way.
What does all this mean for business? Those firms with no demand or cash inflow will be focused on surviving over the next few months. But, in coming weeks, all firms need to be asking how the exit strategy from the lockdown will impact them. Just as crucial is that while companies cope with the imminent recession, they also prepare for the likely rebound when we emerge from this crisis.
Most firms might also need to reassess their business strategies, as this crisis will leave a lasting legacy even for those firms that may be coping well. There could be dramatic changes in some sectors as consumer and corporate behaviour changes. There may be increased opportunities here in the UK, as people prefer to buy things closer to home. If anything, this may help reinforce the Government’s resolve to deliver on its regional agenda too.
The virus could lead to a drive to deglobalisation, exacerbating the trade tensions that came to the fore in recent years. If so, it might impact manufacturers more. The UK, as a leading service sector economy, might be far less impacted. The City, for instance, may receive a boost because of problems in the eurozone. All firms will likely need to reassess their risk strategies, to demonstrate their capacity to cope with future shocks.
Yet, while this crisis will change some things for UK based firms, many of the longer-term trends that were evident beforehand will still be there, not least the fourth industrial revolution and the growth of technology.
Above all, the important thing is that policy helps ensure that most firms emerge from this economic hibernation and back to life.
Dr Gerard Lyons is one of the UK’s leading economists. He is chief economic strategist at Netwealth, on the Board of Bank of China (UK), a senior fellow at Policy Exchange and on the Advisory Boards of the Grantham Research Institute on Climate Change and the Environment and of Warwick Business School. He was chief economic advisor to Boris Johnson when he was Mayor of London and, before that, chief economist and global head of research at Standard Chartered.