This has been a bad smell of a year. More than 54,000 people have died from Covid-19, and the latest forecast, which is expected Wednesday, will show that the economy on the course will shrink by a tenth or more.
Gloomy news of growth and unemployment will provide the backdrop for Rishi Sunaks ‘announcement of Treasury spending plans for 2021-22 and a warning from the chancellor that he will have to take steps to reduce governments’ budget deficits next year.
When the pandemic led to the first blockade in the spring, the thinking was that the UK would have a classic V-shaped recession and activity would return to its pre-crisis levels by the end of the year. In the end, the recession has been less profound but more prolonged.
Economics historians do not compile lists of the 10 worst years for economics in the way that rock critics list their main songs Bob Marley (No Woman, No Cry, according to Alex Petridis himself), but if they did, 2020 would be aty.
To be sure, there would be competition for the No. 1 spot. Few can vividly remember 1919, but in that year, a Britain still shaken by losses in World War I suffered more than 200,000 deaths from the Spanish flu. The line of benefit cuts that broke the Labor minority government and forced the UK to drop the gold standard meant that 1931 was not exactly pleasant. Life for the poor was even tougher in the days when welfare payments were mandatory and there was no NHS.
By now, 1981 would have been the choice of many people for the worst year of the post-war era, because while the contraction in the economy was much smaller than in 2020, it was concentrated in the cities and towns of Scotland, Wales and England north. Entire communities were destroyed and scars still appear.
The last time the economy collapsed with something like the rate that could be seen in 2020 was in 1921, when the inflation boom that followed World War I came to grief. It is not possible to shut down entire parts of the economy without serious consequences, and predictably, businesses have been destroyed and unemployment has risen sharply. However, for most people, the reason 2020 has been so miserable has not been the lack of growth; rather he has not been able to see their elderly parents, being separated from their children, being deprived of the opportunity to go to see their favorite football team or group.
This is because most of the economic shock has been taken from the government, which has borrowed like never before in peacetime to fight the pandemic and support the income of those who have been devastated. Treasury readiness to take the tab explains why, despite a drop in its approval ratings, the Conservative party still nurtures hopes of winning the next election.
All governments want to bring out the bad news at the beginning of the election cycle, and that has certainly been the case. Politically, there is no good time for a pandemic and a monstrous recession, but the least bad time is in the first year after the election. They have more than four years to do before the next voting day and many can happen at that time.
Once the restrictions are lifted, the economy is likely to grow at a rapid pace. Individuals will reduce the savings they have accumulated but have not been able to spend; businesses will decide to move forward with the investment plans discussed during the crisis.
Even after rising by 15.5% in the third quarter, the level of gross domestic product was still almost 10% below where it was in the last three months of 2019. The second block in England, combined with tougher restrictions on the rest of the UK, means there will be an even bigger mountain to climb by the end of 2020.
What this means is that the economy may grow faster than its normal rate for some time before there is any risk of it overheating. It may be two or three years before all the land lost during 2020 is made up.
Governments recover from early setbacks. Clement Attlee had a terrible 1947 but took office in 1950. In 1981, there would have been few participants in the proposal for Margaret Thatcher to win a second term by an overwhelming majority two years later. For the Conservatives, a lot depends on what happens in the next six to nine months, and in part what will be determined by Covid-19 and the response to it.
If there was a third and possibly fourth wave of Covid-19 that led to the reinstatement of restrictions, the economic damage would increase despite any mitigation action the Treasury could take.
But the chancellor also has a big role to play. If he hits the brakes too early and sucks demand from the economy by cutting costs, he will delay and slow down the recovery. During the crisis, Sunak has been making noise about how borrowing should be stopped, with the latest statement of future fiscal content coming in a Sunday Times interview in which he joked that he wanted to get the prime ministers credit card.
He may really have trouble doing that. The prime ministers ’strategy as evidenced by the huge defense budget increase announced last week is to continue spending heavily in the hope of a strong economic recovery that will convince voters that 2020 was a mistake. And there are many economists who think Johnson is right.