Just to bring everyone down on a sunny Sunday afternoon, I’ve spent most of the past week talking to people/thinking about the eventual recovery, and it’s all looking a bit grim. Fairly depressing thread follows.
The most obvious point is that any return to normality is going to be gradual/halting - there won’t be a moment when a klaxon blows and we troop back to offices/pubs. Economy will reopen in sectors, or for specific people (‘The Immune’), and may be reversed if a second wave hits.
In other words, there will be fewer customers, fewer workers, less confidence. So the shock is unlikely to be a one/two-quarter wonder.
Next issue, obviously, is that the economy will be smaller anyway - despite govt’s best efforts, jobs are being lost at scale and firms are shrinking or closing completely.
But an additional problem is the paradox of thrift. This is the idea that it may make sense for individual firms/people to scrimp and save, but it’s ruinous for the wider economy.
Britain already has a longstanding and grisly problem with business investment. The economy in recent years has largely been kept afloat by the willingness of individual consumers to spend, spend, spend.
One of the big things that held the economy back after 2008 was deleveraging - banks not lending as much because they needed to massively reduce their debt mountain. That reduced the amount of money flowing round, and hence growth.
Now (as @rbrharrison and others have pointed out) we’re likely to have the opposite - banks in rude health and keen to lend, but firms (and individuals) who have built up debt during the crisis that they want/need to get off their books.
Eg if you’re a small business that used CBILS to cover your rent costs during the crisis, that’ll be extra cash you eventually need to pay back. Even if we treat it like student debt and say it doesn’t affect your credit rating, it will still hang over you.
Plus there’s copious evidence that SMEs in the UK have long been reluctant to take on/hold debt financing from the banks anyway - many man-hours of Treasury time spent trying to fix that problem. Hard to see why they’d be keener to borrow after this.
But it’s not just about debt - for both firms and individuals there will be an understandable impulse (slash commandment from shareholders in the case of larger companies) to hold considerably more savings against a repeat of this horror.
The result is that everyone does what’s sensible for them, but no one’s spending/investing, so the economy struggles - making everyone more reluctant to spend/invest in turn.
That’s without considering the knock-on effects of downturns/recessions in our major trading partners. Or the fact that the Government - having spent all this cash to prop the economy up - will be strongly tempted to try to claw it back, via higher taxes on that smaller tax base.
Have said throughout this that I think @rishisunak and the Treasury have done a remarkable job of innovating at speed. But the policy solutions to help get us out of this may have to be just as innovative as those to get us through it.
(Which is of course why we at @CPSThinkTank are thinking very hard indeed about all this. But any suggestions more than welcome - replies open, as are DMs...)
