It could have been worse

The unprecedented 20.4 per cent slump in UK GDP in a single month is obviously headline news, but still needs to be put in context. There are three key points.

First, the April numbers are old news – about two months old. That’s an awful long time during a rapidly evolving crisis like this. Indeed, we already have plenty of evidence that economic activity began to pick up in May, even while the bulk of the official lockdown was still in place. That recovery will hopefully accelerate further over the summer as more restrictions are lifted.

Second, the fact that GDP collapsed in April is hardly a revelation. At the time, we actually wanted most people to stop doing what they would normally be doing, in order to save the lives of many others. Nor is the UK alone. Most countries do not publish monthly GDP data. But other indicators (such as industrial production, retail sales and business surveys) suggest that other economies with similar lockdowns have seen similar falls.

Third, the April numbers were actually not as bad as many had feared in the early stages of the pandemic. Taking March and April together, GDP has fallen by about 25 per cent from its pre-crisis level, but that should be the low point. In contrast, the Office for Budget Responsibility’s projections for the public finances are still based on a 35 per cent fall, sustained for a full three months. The Bank of England had warned of a 30 per cent decline. In reality, GDP could drop by ‘just’ half that amount in the second quarter as a whole.

Indeed, it shouldn’t be a surprise to see some upward revisions to GDP forecasts on the back of these numbers. The OBR’s coronavirus reference scenario assumes a 12.8 per cent decline this year, and the Bank has gone for 14 per cent. The OECD’s gloomy UK forecasts published on Wednesday also now look out of date. For what it is worth, my own best guess for 2020 as a whole is a (still huge) fall of about 7 per cent.

Nonetheless, this less pessimistic view also depends on three points.

First, it is essential that the government continues to ease the official lockdown and to get other parts of the economy, including schools, functioning normally again. Of course, the lockdown itself may only be one of the reasons why activity has slumped, but it is by far the most important. There was a clear correlation between the extent of the official lockdown in a wide range of countries and what happened to their GDP in the first quarter of the year: greater stringency was associated with bigger falls.

Second, the government needs to improve the consistency of its messaging. At the moment it feels like a few steps forward (reopening of non-essential shops and greater freedom to meet others) and a few steps back (face masks on public transport and backtracking on the reopening of schools). I understand this is not easy, especially given sometimes conflicting scientific advice and the risk that the pandemic resurges. But restoring consumer and business confidence will also be essential to drive a strong recovery.

Third, and this could be just as hard, the government needs to be bold and resist the temptation to spend and intervene even more, rather than let markets do their job. Demand should rebound on its own provided, people are able and willing to spend again. Instead, the focus of economic policy should now be shifting to measures that help the supply side, including well-targeted tax cuts and deregulation.

In short, the collapse in GDP in April is likely to have marked the bottom of the cycle. But with the public health emergency now easing, the government should gradually move aside and get out of the way of the recovery.

This piece was first published by the Daily Telegraph (online)

One thought on “It could have been worse

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s