The UK economy — what needs to happen
Today, the UK reported that in the second quarter of this year, real GDP fell by 20.4 per cent after a smaller, but albeit already troubling decline in the first quarter. This means that the UK has been in technical recession. The UK has experienced the second largest drop in the second quarter of all countries that have so far reported, after Spain which fell by a huge 22.4 per cent. For comparison, the UK decline was around double the decline reported in the US and Germany, and in terms of some of the “best” performers, South Korea reported a more modest decline of 3.3 per cent.
Estimated June real GDP rose a sharper than expected 8.7 per cent, but even so, most forecasters are predicting that the UK will experience close to the largest 2020 decline of any country and that it will be either late 2021 or beyond, before real GDP returns to its pre-Covid level. The OECD, which is slightly more pessimistic than most, forecasts that the UK will report an 11.5 per cent drop for the full year, the worst among its 37 members. By way of comparison, South Korea, is expected by the OECD to drop “just 0.8 per cent”.
The South Korean example is one that all the OECD member countries and much of the rest of the world should study, given its modest GDP hit, and especially given that it was, along with Italy, the first country outside China, to be notably hit by the pandemic. Indeed, it might be time well spent if our Prime Minister asked representatives of the Korean government to spend half a day on a zoom call with his full cabinet, explaining how South Korea performed so well .
The Prime Minister, the Chancellor and others are eager to point out that we were supposedly bound to have a bigger hit than most nations from the lockdown due to the very large share of the services sector in our GDP. This tends to rely on close human interactions. It is true that we have a relatively large service sector — so why didn’t our policymakers think more carefully before deploying the blunt tool of a mass shut down? Couldn’t more selectively chosen localised sector and regional shutdowns have been chosen? It is not as though our system-wide shutdown resulted in better health outcomes. It is tough to look back and give high marks for decisions made. South Korea and many other nations have not yet gone through full nationwide shutdowns, and this is almost definitely why their GDP loss has been much more modest.
From here on, these should be our priorities.
First, another full nationwide lockdown should be avoided, even if the reported incidence of the virus continues to increase, as it has done in recent days. The economic cost does not justify such an approach, or expressed differently, the government would have to demonstrate with confidence that second time around, the cost of lockdown would be more beneficial, both economically and health wise.
Second, the government needs to ensure that its weak track and trace system can work better, as otherwise localised shutdowns cannot work. If the system cannot be made fit for purpose, the government will only be dealing with outbreaks after they have spread. This will then require tougher, longer shutdowns.
Thirdly, South Korea is the only country of more than 50 million people in my lifetime that has progressed from very low income to a high income economy. The lesson from this — we need to truly introduce all the best modern technologies to all parts of the UK and for all our citizens. On indices of mainframe computers, laptops, mobiles and so on, South Korea is one of the best-performing countries in the world. The UK, needless to say, is far down the list. Many parts of rural Britain still have no mobile connectivity at all. This is ridiculous for a country that still regards itself as one of the most advanced in the world.
Fourth, the government must make sure that Covid-19 emergency policies don’t distract from the levelling-up agenda. According to the Financial Times , the Chancellor is again considering a delay to the much awaited spending review. One can sympathise with the broad dilemma of not knowing where our debt levels will eventually settle, which makes future spending plans very hard to make. But the government’s levelling up agenda becomes more urgent as a result of this crisis, because it would benefit the parts of the country most likely to suffer most in this recession.
Fifth, the government should follow its decision to prioritise test and tracing within local authorities and to devolve much more. Why do these decisions need to wait for the rigmarole of annual budgets and occasional spending reviews? The scale of centralisation in modern Britain, especially in England, is partly responsible for our woeful geographical economic inequalities. More devolution of powers on education, skills, local spending decisions, and even perhaps some greater tax raising powers, should be urgently pursued.
And si xth, there should be a review of the macro economic framework for monetary and fiscal policy in the UK. Post-Covid, there is a need for a new fiscal framework, and as I have argued on these pages in recent months, including just last week, the age of Bank of England’s inflation target as a guide to setting interest rates is long past its usefulness. As Brian Griffiths articulated well, you can debate the merits of nominal GDP targeting, which I advocate. But the challenges of recovering back even to pre-2020 levels, never mind doing something to boost our dreadful productivity performance requires urgent action .