How does the UK economy go back to growth after COVID-19?

24th July 2020

The United Kingdom is now in a recession with economic experts unsure as to what, if any, future growth in the economy will look like. For the recession to not turn into a depression the economy would have to bounce back better than ever before, unlikely given the current economic climate. Unfortunately, the unemployment figures are set to rise further as companies start to transition from the furlough scheme back to full time employment. Small and medium sized businesses still have to assess the true impact of the lockdown, as social distancing eases and they are better able to gauge whether demand for their business will be able to keep them afloat.

The idea that everything will go back to normal after all the social distancing measures have been relaxed is a very optimistic view. This would be typified by a V-shaped recovery scenario as promoted by the Chief Economist at the Bank of England, Mr Andy Haldane.1 This has been criticised by financial experts, predicting at best that the economy may take a while to turn around creating a potential U-shaped recovery where growth is slow or stagnant before picking up. The pessimistic view is that the decline in growth will stop but then stagnate with no real way of growing. Some think that this L-shaped model, where growth goes down and will not grow for a significant period, is actually a realistic scenario. Without the demand for goods and services pre-COVID-19, and increasing unemployment levels, this L-shaped recovery is looking more likely.

The pandemic has been so broad and hard hitting in its effects, with such a level of uncertainty as to when it will end, most people will not be looking to spend their savings. People are now saving what they have and investors are being savvier with their money. There is a significant number of people unemployed and on benefits or worried about keeping their job, with unemployment potentially reaching 1980’s Thatcherite levels of over 3 million people.2 However, though the unemployment is now not as big in percentage terms of the population, it has occurred in a much shorter time frame.

Combined with the new fear of the virus, risk of travelling and lack of work opportunities, it is going to make people hold onto their savings even more. This significant reduction in the level of spending will reduce tax to the treasury, making it more difficult for the government to find cash to inject into public sector spending, and so the cycle continues. Without investment there is no growth. This is a typical recessionary conundrum and why it is better for governments’ to borrow money, to be paid back with interest, than let the economy stagnate. However, the government has already borrowed unprecedented amounts of money and the economy was still on a recovery path from the financial crash of 2008. The government borrowed £35.5 billion in June 2020, about five times higher than the same month the year before, taking the total government debt to a record £1.98 trillion.3 Paying back this money is going to be difficult and costly. GDP is predicted to fall by around ten per cent, twice that of the 2008 financial crash.

The stock market has been hit exceptionally hard with financial markets down 25% since the start of the year. The airline and leisure industries have been particularly affected, as well as oil companies and manufacturing, all with big FTSE 100 companies struggling to move forward. EasyJet and cruise operator Carnival have dropped out of the FTSE 100, along with aircraft parts manufacturer Meggitt and British Gas owner Centrica. Anything invested in the stock market will also suffer, such as pensions. The Bank of England has requested that all banks in England stop paying dividends to their shareholders. They are making sure that banks have enough money when companies and small businesses start failing. Companies that have borrowed over the crisis may not have any way of paying back their loans if demand does not pick up.4

A recession of this severity is not easily overcome. Comparisons are being made to the stock market crash of the 1920s and the following depression. However, the depression of the 1920s and ‘30s was only ever truly eradicated when demand for workers was increased dramatically, due to a demand for goods and services as a result of the industrialisation of the Second World War. Without that level of demand, the recession may technically end but a depression and high levels of unemployment could go on for years.

Manufacturing has historically been the driving force of growth. Essentially producing goods is what gives us what we want and keeps the capitalist model thriving, while providing employment for the masses. However, it is feeling the pinch due to a change in working practices and reduced consumer demand. Any growth recently has been in industries that produce healthcare or personal protective equipment related products and services to combat COVID-19.5 Any industry connected to helping battle the COVID-19 pandemic will do well and potentially have a long term market but any immediate spike in demand will also go down once the initial crisis is over and competitors start to gain a foothold.

Some industries have done well during the pandemic and have enabled people to spend while at home, such as online deliveries and home entertainment. Though they will not provide a long term economic solution they may point the way to possible industry changes. Given what has happened it seems prudent to attract investment for long-term growth in areas such as life sciences and the healthcare sector.6 Encouraging research and development into innovating technology may be a path through to recovery and also provide much-needed defence against future outbreaks, the wider cost of which has been shown to be far more damaging than anyone could have foreseen. This alone would make any preventative investment worthwhile.

The government needs to find new ways of encouraging innovation yet increasing sectors that will utilise more workers. Technology is set to increase in everybody’s lives from new working practices, yet this is not always beneficial for the labour market. The increase in artificial intelligence means that machines are essentially building machines. Many high street shops have closed down due to the increased use of online shopping and people now expect goods and to come to them rather than the other way round.

The security sector is looking to technological innovations such as thermal cameras, facial recognition software and increased use of high-tech solutions. While possibly effective and cost-saving they are essentially labour-saving devices. Supply chains look to be revolutionised by technology and given the effects of a pandemic the fewer people involved face-to-face the better.7 Even the defence industry is looking to improve its technology over increasing its personnel. The death of a soldier is far too costly to its image and the increasingly hi-tech levels of fighting often leave them redundant. The space race is a specific example where increased technology in satellites and weaponry are requiring fewer, smarter individuals. This requires increased levels of training for maintenance, software engineers and intelligence officers, not multitudes of people.

High unemployment is often not the whole picture and can hide the true state of people out of work. Unemployment figures only count those people out of work that are actively seeking employment. They do not count those people who are long term sick, re-training or studying, or wanting time off from work.  Youth unemployment is nearing one million and businesses are struggling to recruit young, work-ready staff.8 A new report has highlighted that recessions affect youth unemployment more than other categories due to their lack of experience and disposable income and has called for more support to prevent “years of reduced pay and limited job prospects”.9 The Chancellor Rishi Sunak has recognised the importance of this issue and has recently implemented a £2 billion scheme aimed at creating jobs for those aged between 16 and 24.10 With many apprenticeships being cancelled due to tightening budgets, many young adults will be forced into carrying on in study but it will be years before the full effect is known.

Where is the level of employment going to come from in the future to drive growth and reduce government spending? In an increasingly technologically advanced world, manufacturing cannot be seen as the panacea to solve both unemployment and drive economic growth. A new economy made up of innovation and knowledge-based services needs to arise. This will require re-training for many and repurposing of skills. However, it may also necessary to reset thinking of the labour market and incentivise industries that require traditional jobs such as farm work and textile manufacture, with a focus on self-sufficiency rather than trade. This may help future proof the economy and help the labour market be less volatile if interruptions in global trade happen again in the future. Accepting a lower level of economic growth in the future, though not attractive, will increase stability and financial confidence in the markets over the long term.