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Same old same old…

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I am reliably informed that there are some districts in the USA where mentioning the term “the new normal” will get you hauled out of your car and beaten unconscious by some “mostly peaceful” kid with a skateboard.  It wasn’t always this way.  Back in the early days of the Covid-19 pandemic, the sudden breach of social, economic and political norms allowed people to imagine a very different future.  Governments discovered that there was a magic money tree after all; and if they could spirit currency out of thin air to bail out corporations, why couldn’t they do the same to invest in a new green economy?  People came together too, demonstrating that the supposed dog-eat-dog free market was not so pervasive as the establishment media would have us believe.  Public services – and particularly advanced healthcare provision – took on a new importance as it became clear that “the market” could not adapt to the sudden shock of a potentially deadly virus.  The economy – it seemed – could take a back seat while we came to terms with the emergency.

During those warm and sunny spring days when, for many, lockdown was something like a prolonged Easter holiday in front of the TV, all of the talk was about a so-called “V-shaped” recovery.  Pent up demand together with state support for jobs, we were told, would unleash a consumer boom the moment the restrictions were lifted.  And to some extent, this is what we saw in June and July, when people were allowed back to the shops once more.  It wasn’t, though, the V-shaped boom we had been promised.  With the virus still spreading around the world and with neither a treatment, cure nor vaccine in sight, two-thirds of us decided to avoid too much contact with potentially infected people.  And so footfall remained significantly down on the previous year even as online shopping failed to close the gap.  GDP recovered around half of its April-May losses; but this still meant a recession deeper than any in the previous century.

New terms entered the economics journalism lexicon.  A “U-shaped” recovery was still possible according to the optimists.  The pessimist demurred.  An “L-shaped” recovery was far more likely; with the economy not getting back to its 2019 level before 2023.

That was before the alarming increase in positive tests since mid-August.  With the government’s public health experts predicting a dangerous increase in infections pointing to the feared “second wave” as Autumn sets in, government has once again been obliged to restrict people’s activity; with many areas facing new “local lockdowns.”  Coming just at the time when business and job support schemes are coming to an end, the fear of a second wave looks set to bankrupt thousands of businesses as consumer demand dries up once more.

One result of this is another addition to the lexicon: the “K-shaped” recovery.  As Allana Akhtar at Business Insider explains:

“A K-shaped recovery is somewhere between a V and an L — depending who you are. In the ongoing US recession, industries like technology, retail, and software services have recovered from the industry and begun rehiring, while the travel, entertainment, hospitality, and food-services industries have continued to decline past March levels.”

There is more to this than meets the eye though.  It is not just that some sectors of the economy are recovering even as others continue to decline.  As Kiersten Schmidt at Grow acorns notes:

“Industries that were hit hardest by the pandemic-induced shutdowns tend to be the ones where workers are paid the least. Workers in retail and leisure and hospitality earn some of the lowest wages, according to the Bureau of Labor Statistics…

“While high-income earners — those making over $60,000 per year — have largely seen their employment rate bounce back to where it was at the start of the year, the employment rate for workers making less than $27,000 per year is still down 15% since January.”

And, of course, those at the very top who derive their income from investments in the stock exchanges and money markets have continued to increase their wealth throughout the crisis; many trousering large state bailouts along the way.

There is another term for the “K-shaped” recovery; it’s called “business as usual” – or at least an accelerated version of it.  In the words of the late Leonard Cohen:

“Everybody knows the fight was fixed, The poor stay poor, the rich get rich, That’s how it goes, Everybody knows…”

The trouble is that business as usual was already taking us into dangerous social and political territory long before SARS-CoV-2 embarked on its world tour.  Brexit, the election of Donald Trump and the wave of nationalist populism that spread around the world from the middle of the last decade, were merely the early, and relatively benign, rumblings of a new class war that threatens to plunge us into a new and violent dark age in the event that the few continue to ignore the plight of the many.

The sight of UK Chancellor Rishi Sunak hurrying to the aid of venture capitalists even as the hospitality and travel industries are reduced to ashes, points to a government prepared to take a reckless gamble on its ability to keep the lid on social and economic tensions as the full weight of the recession is felt.  And this is happening prior to the anticipated public health response to an autumn wave of Covid-19.  As Ross Clark at The Spectator asks:

“Does anyone really believe that it will stop with the relatively light measures announced on Tuesday? Already, the government is reported to be drawing up plans for a two week mini-lockdown for sometime in October. And if that doesn’t lead to falling new infection rates, or if rates rebound as soon as the restrictions are lifted? The government has signalled clearly that it is now following a policy of outright suppression of Covid 19…

“The question now is: will there be anything left of the economy either?”

Camilla Cavendish at the Financial Times identifies a dangerous mismatch between the government policy and public response to the threat of a second wave:

“If Britain were the bolshie, rule-breaking nation ministers assumed we were back in March, it might make sense to be unveiling graphs of doom, spreading rumours about cancelling Christmas and lecturing pubgoers about drinking in ‘the last chance saloon’…

“But most people in the UK have turned out to be incredibly anxious about the virus, with thousands reporting their neighbours for the slightest infraction. In July, a month when the sun shone and hospitals were normal, one poll found 60 per cent of Britons saying they wouldn’t feel comfortable in a bar or restaurant. In another, nearly 80 per cent said they would welcome a second lockdown if there was a second virus spike.”

As happened in March, this cautious public mindset is likely to force government to implement ever tighter new restrictions and ultimately a new national lockdown just at the point where the economic damage caused by the first lockdown is being felt.  This has led some analysts to question whether the UK economy is strong enough to withstand a second lockdown.  Even if the virus magically disappeared, sectors of the UK economy are simply not coming back.  Others will take years to recover the ground lost in the spring.  As Oscar Williams-Grut at Yahoo! Finance reports:

“Some sectors of the economy will never return to pre-COVID levels, the chief executive of Britain’s fastest growing bank has said. ‘There’s segments where the new normal will have real scarring, and by scarring eventually they won’t return, in our view, to 2019 levels,’ Rishi Khosla, the chief executive of OakNorth, told Yahoo Finance UK in an interview last week.

“Khosla said High Street retail was a ‘perfect example’ of a sector that will never return to normal. ‘In our estimation, for each percentage increase in online sales, you lose about 1.5-1.7% of retail square footage physical,’ he said.

“’If you play that through, if you’re talking about a 10% increase in online sales in the new normal — clearly at the moment it’s higher — then you’re looking at anywhere between 15-17% reduction in retail sales square footage and I would say that would disproportionately hit High Streets’.”

In other words, an already failing economy is about to be devastated by a slump in consumer spending which will ripple through the wider economy.  And this raises serious questions for government policy makers.  The initial response to the crisis was based on the (as it turned out, false) assumption that the pandemic would be over fairly quickly.  By bailing out existing firms and supporting existing jobs, government hoped to ensure that once the virus had gone away, we could make a relatively rapid return to business as usual – albeit with many casualties along the way.  But as the nights draw in and the virus stubbornly refuses to disappear, a longer-term economic policy is needed.  As Chris Giles at the Financial Times explains:

“When coronavirus lockdowns appeared to be a short-term emergency response needed to buy time to beat the virus, job subsidies were a smart way to minimise disruption and eventually allow a return to normal. This sort of public insurance works best when the crisis is short, the affected companies require skilled workers and the jobs at risk are high value.

“The longer the world has to live with social distancing and the more sectors are unlikely to return to their former glory, the more important it is to find a different solution. In that case, we need to support workers rather than jobs, helping them find alternatives rather than simply waiting and hoping that their old jobs come back…

“Supporting people rather than jobs also works better when the roles at risk are lower skilled because fewer months of training are lost when people switch to other positions. With the pandemic disproportionately hitting the lower-skilled and worse-paid retail, hospitality and travel sectors, it is increasingly workers who deserve our support more than their employers.”

The bigger question though, is whether even this is enough.  Prior to the pandemic, the Johnson government talked optimistically about “levelling up” the economy; bringing new prosperity to those ex-industrial regions which switched from Labour to the Tories last December.  The pandemic put paid to that pipedream, and left us at risk of a “levelling down” in which more home working and less demand for city centre office space brought Britain’s retail apocalypse to its logical conclusion.  This raises the question of whether the government – in Canute-like fashion – should seek to halt the economic tide or attempt to get out in front of it.  As Larry Elliot at the Guardian ponders:

“The Covid-19 crisis revealed that Britain was ill-prepared for a pandemic. It was deficient in both human and physical capital. It made a vague pass at having strategies for energy, industry and skills, but no more than that. Once the scale of the crisis became obvious, the Treasury and Bank of England did as much as they could to mitigate the impact. Even so, the past six months have already left scars: even weaker productivity, a loss of schooling, and zombie companies kept alive by low interest rates and Treasury-backed loans.

“The country is now at a fork in the road. One way leads to the place on the map known as ‘business as usual’. This involves talking a lot about the need for fundamental change and the importance of doing better next time, but in reality means carrying on as before. The other route offers potentially greater rewards, but is far tougher because it requires behavioural change on the part of government, companies and individuals. It means a national business plan, ambition, hard graft and tons more patience than has been shown in the past…”

As Elliott concludes… “Don’t hold your breath!”

As you made it to the end…

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