The economy after lockdown: the old normal isn’t good enough

2020 was a horrendous year for the British economy, with annual output down about one-tenth. This collapse in economic activity is widely attributed to the coronavirus pandemic. In November 2020, for instance, the BBC’s Newsnight described how the UK was facing ‘the worst recession in 300 years as Covid crisis continues’.

It reported the chancellor Rishi Sunak warning that the ‘economic emergency’ caused by Covid-19 has only just begun. Similarly, Andy Haldane, chief economist at the Bank of England, summarised how ‘economies have taken a huge hit as a result of the Covid crisis’.

However, such short-hand portrayals are not sufficient, especially for assessing the lessons of the pandemic for any similar future health crises. The coronavirus that dreadfully killed so many people did not itself have a significant direct impact on economic life. The ‘huge hit’ of ‘the worst recession in 300 years’ did not result from the disruption arising from all the tragic deaths and from infected people being unable to work. Rather, the economic devastation was primarily the consequence of the restrictions imposed on societies by many governments, including by Britain’s.

It is no service to grieving families and friends, and to the many more who have been devastated by the financial hardships of the past year, to blur this distinction between the disease itself and of how governments decided to respond to it. We might not be able to prevent another coronavirus pandemic, but from the alarming experiences of this particular one, we can choose to respond better next time, including avoiding so much economic hardship.

Preparing for a pandemic

The pertinence of particular government decisions is illustrated by the correlation between the economic performance in different countries and the varying use of national social restrictions, in particular lockdowns. Partly informed by their earlier experience of SARS, many countries in east Asia were better prepared for the pandemic than Britain and other developed countries in North America and Europe. Several of them adopted a successful targeted approach, including making effectual use of test, track and isolate procedures.

Proficient control of Covid-19 in these Asian countries avoided economy-wide lockdowns and allowed much of industry to keep running, minimising the economic damage. Hence the contrasting economic outcomes. While in aggregate the advanced economies that mostly used extensive and prolonged shutdowns contracted by almost 5% in 2020, countries that were able to avoid such indiscriminate social restrictions performed much better. For example, South Korea also contracted, though only by about 1%, while China expanded by over 2%, and the Vietnamese and Taiwanese economies each grew by about 3%.

This comparison shows that it was humanly possible to address the same global pandemic and be more effective than Britain has been in limiting death rates as well as mitigating the economic losses from the confinement actions taken. These different approaches to managing the pandemic further illustrate that the mortality-versus-prosperity trade-off that was used against those who questioned the costs of lockdown was not just morally invidious but was also empirically unwarranted.

Underlying problems

While the 2020 headline contraction in British economic activity was significant, the economic repercussions of the lockdown are more far-reaching than the changes to gross domestic product (GDP). In fact, it is feasible that during 2021, the GDP metrics will bounce back quite rapidly from their lockdown lows. Reopening societies and letting people resume their social and economic lives, even if not fully, will translate directly into higher levels of output. Nevertheless, beyond the GDP figures, and regardless of how long some social restrictions are extended, the effects of the lockdown have already amplified several long-running economic problems.

These existed well before the appearance of Covid-19, and are likely to be more pronounced even after the post-lockdown resurrection of economic activity. Three in particular have been exacerbated by the lockdown experience: first, the British economy’s zombifying dependence upon debt; second, its diminishing capacity to deliver decent living conditions for its citizens; and third, the failure of government, so far at least, to confront the long economic depression with policy actions of commensurate radicalism and substance.

More important for growth and prosperity prospects than the direct economic impact of the lockdown will be what it means for the direction of government policy. Big crises offer opportunities for fresh thinking, something which for several decades has been sorely absent in the economic arena. Since the 1980s governments of all political stripes have avoided taking responsibility for shaking the economy out of its malaise of declining business investment and flagging productivity growth. Instead, they have pursued the seemingly easier path of using policy ­– monetary, fiscal and regulatory – to try to preserve the status quo.

This has worked to keep most of the old economy going, though at the expense of intensifying its drawn-out atrophy and causing ruinous consequences for living standards. Low-productivity and underinvested economic activities have been kept afloat. These are the zombie businesses that are just able to cover servicing their existing debt, sometimes reliant on a bit more borrowing to do so, but without the means or the incentives to invest in future growth. Moreover, they also act to clog the economy up and crowd out growth by stronger firms.

The expansion of corporate indebtedness during the lockdowns has reinforced this constraint on economic expansion. Research published by the Bank for International Settlements indicates that the zombie share of British firms had grown from low single-digit percentages in the mid-1980s to about one-in-five before the pandemic arrived. Even against this backdrop, emergency public support measures were an appropriate response to the lockdown since firms and workers were being hit by government decisions over which they had no control.

The debt dilemma

However, the inevitable consequence of their implementation has been to extend further the corporate dependence on debt. This deserves to be very high in government focus because when the exceptional state measures are wound down, we are likely to see a jump not only in business insolvencies and redundancies but possibly also an even bigger one in companies left in a zombified state.

As a result of the lockdown, the debt trap has expanded not just for these businesses, but for policymakers, too. Responding to the economic contraction, the government and the Bank of England acted in tandem to extend debt across both the public and private sectors of the economy. During 2020, the Bank of England announced a further £450 billion in its quantitative easing programme of purchasing bonds, mostly of government issue. This scale of increase is hard to fathom, but it was slightly more than the total amount of assets purchased over the preceding 10 years, taking the target stock to £895 billion – equivalent to over 40% of GDP. Regardless of the continuing protestations about central bank ‘independence’, this expansion of liquidity has facilitated the increase in public borrowing during lockdown, which is expected to total about £350 billion in the year to the end of March 2021. However, easy monetary policies do more than expedite government deficit spending. They have been enabling and subsidising the whole economy-wide expansion of debt.

The debt dilemma that has been multiplied by the lockdown measures arises because an increasingly debt-dependent economy becomes precarious, reliant upon the continued support of lenders. Nevertheless, trying to reverse this dependency is likely to be just as destabilising, because it risks pushing debt-reliant operations close to, or over the brink of collapse. One aspect of the conundrum is that the central bank is reluctant to tighten monetary policy for fear of accelerating financial and economic instabilities. The lockdown repercussions have exacerbated these policy tensions, including the concerns of central bankers in Britain and elsewhere, that tighter policies could crash asset prices that are even more inflated following the emergency stimulus of the past year.

Increasing poverty

Second, following on from the failing economy, the lockdown has magnified the resultant impoverishment of wider sections of people. The social impact of the long depression since the 1970s is expressed as a broadening shortfall in the economy’s capacity to deliver productivity growth and therefore prosperity for its population. For the past half-century, an increasing proportion have been finding themselves unable to attain work that provides for a standard of life in line with customary expectations. For a start, some key employment rates have fallen. Fifty years ago, more than nine of every ten men of working age were employed. In most years now it is less than four out of five.

Just as striking has been the decline in the quality of employment for those in jobs, bringing lower pay and decreased security for many. Slower growing, flatter productivity makes for slower growing, flattened incomes. Real wage growth has become so sluggish that on the eve of the pandemic, median weekly earnings for full-time employees remained lower in real terms than a decade previously. The Resolution Foundation think-tank highlighted that the past few years have been particularly harsh for low-income households, whose typical income was no higher in 2018-19 than nearly two decades earlier in 2001-02. An assessment made by the Joseph Rowntree Foundation before the pandemic was that the number of workers in poverty had almost doubled since the mid-1990s to reach four million. Significantly, this was not predominantly due to the much-discussed gig economy and zero hours contracts; almost half were in full-time employment.

The economy’s waning ability to provide good jobs for people who want and need them has made it tougher for people to manage their financial affairs. As a result, more are being forced to resort to the ordeal of personal indebtedness, or to the dehumanising dependence on meagre state handouts, or to both. The lockdown impact has reinforced these dissimilar financial circumstances of people arising from an already weak economy.

This went beyond the obvious bifurcation in lockdown experience with white-collar and professional workers often able to work from home, while many production and labour-intensive service workers did not get that choice. The differing sectoral effects of lockdown saw lower-earning parts of the workforce, notably in hospitality, non-essential retail, leisure, the arts and personal services worst affected. The follow on was that lower earners concentrated in these most impacted sectors were more likely to be furloughed or to become unemployed. A House of Commons Library briefing summarised that among workers, those from an ethnic minority group, women, the young, the low-paid and the disabled were the most negatively economically impacted.

Uneven financial means were therefore aggravated by the lockdown. Unsurprisingly the Joseph Rowntree Foundation’s assessment of the pandemic experience found that people already struggling to keep their heads above water have often been hit the hardest. Recall that the furlough scheme, while immediately preferable to people than redundancy, compounded financial woes by consigning millions of lower-paid workers to live on only 80% of their previous earnings. And that excludes the deprivations caused to the unknown number of self-employed out of a potential pool of 2.5 million, according to the Institute for Fiscal Studies, who were unable to claim due to the restricted conditions of the self-employed support scheme.

Post-pandemic recovery expectations for a release of “pent-up” demand point to how the lockdown removed many spending opportunities and produced a jump in household savings. However, the Bank of England itself showed this was far from universal. The already less well-off, including the furloughed and the unemployed, bore the biggest financial brunt and had to eat into any existing savings and, for many, go further into debt. Far from cutting spending during lockdown, the Resolution Foundation found that many low-income households, particularly families with children who were shut out of schools, increased their expenditure on food and other essentials.

It seems the legacy of the lockdown for many people ­– those who do not find themselves newly unemployed from business closures – will be a return to their previous inadequate employment with even more personal debt commitments to juggle. As it was before the pandemic, the quality of employment provided may remain a more significant measure of the economy’s strength than the absolute numbers in some type of work. Employed or not, many people’s material autonomy to live well is likely to be further impaired, even with a bounce-back recovery.

A radical alternative

Third, because of how the lockdown has amplified these two tendencies of economy-wide indebtedness and of individual and family hardship, politicians and policymakers now have a choice to make. They can continue with the decades-old muddle-through approach. This seeks stability in the present at the cost of tolerating the legacy of nearly five decades of decaying productive capability, with the greater financial and economic instability that this portends. Or, learning from how the lockdown has brought pre-existing economic quandaries closer to the surface, politicians can resolve at last that their evasiveness must end.

This radical alternative requires that government turn its mantra about ‘building back better’ into a comprehensive programme of structural transformation. The crucial focus should be creating good-quality jobs. This includes state institutions stopping their actions that extend zombification. It means the government sponsoring, with sufficient long-term, venture capital-style funding, the creation of new businesses and quality jobs across many befitting sectors, including transport, health, energy sources and improved agricultural, construction and production techniques. And third, it requires state support for people during the inevitable dislocations of the transition from the old economy to the new. One of many benefits of pursuing economic renewal along these lines would be to create the wealth for providing the stronger healthcare and social care systems that would have saved a lot more lives during Covid-19, and can help save more in any future public-health crises.

However, the initial signs from government are not propitious. Existing budget plans to pump more money into the economy can spur GDP expansion in the immediate post-lockdown period, but they won’t fix the long-running structural economic problems. Emergency government interventions can be necessary in a crisis, but permanent artificial stimulus is counter-productive as it drains away resourcefulness and initiative.

A bigger dose of ongoing state stimulus measures is likely to reinforce decline by propping up incumbent businesses and sustaining low-quality jobs. Over the longer-term that is no better for people than if the fiscal hawks took control and sought to balance the Treasury’s books precipitately. Under both scenarios, the government would continue to evade tackling the productivity slump. Initial signs of persisting preservationist practices are matched by the government seeming to have given up on substantive productive transformation through abandoning its own already limited industrial strategy, launched only four years ago.

The lockdown’s consequences have highlighted Britain’s economic fragilities, but maybe not to those who have become inured to the social realities of economic depression. This government may still change its ways, but its approach so far indicates that it would be imprudent to wait for a Whitehall-initiated economic renaissance. A more constructive way forward could extend the People’s Lockdown Inquiry into a people’s inquiry into economic renewal that encompasses local and regional forums for change set up all around the country.

Phil Mullan

Writer, lecturer and business manager

Phil Mullan is a writer and business manager, who researches and lectures on the interplay of economics and politics. His work is informed by over two decades of experience in senior management and advisory roles in international business.

His latest book Beyond Confrontation: Globalists, Nationalists and Their Discontents (Emerald Publishing, 2020) addresses the crumbling of the post-1945 world order and the intensification of international rivalries.

He previously wrote Creative Destruction: How to Start an Economic Renaissance (Policy Press, 2017) and The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem (IB Tauris, 2000).

Currently working independently, in 2014 Mullan completed eight years in senior management roles with Easynet Global Services, an international communications services company. Previously he had been chief executive of the internet services and training company Cybercafé Ltd.

Follow him on Twitter at: @Phil_Mullan