As Covid-19 restrictions begin to gradually ease, can the UK restart the economy and align it with longer-term growth goals, namely, to be more productive and greener?
The UK is emerging from lockdown, including re-opening non-essential shops, this week. It comes after April’s GDP figure showed a record contraction in monthly economic activity of -20.4%. Together with the March GDP estimate of -5.8%, it means the UK economy is more than a quarter smaller than in February due to lockdown being imposed on March 23. Economists expect May to also reflect the effects of the lockdown, so the economy is likely to have contracted further in the second quarter.
But, with the easing of lockdown, the OECD forecasts that GDP growth for the entire year would be -11.5% or -14% with a second lockdown. In line with other forecasts, it suggests that the second half of the year will see economic activity pick up in line with the easing of restrictions.
This pick up in activity will require support. In other words, the recovery needs government support just as coping with the shock did. This offers an opportunity to use fiscal policy to restart the economy and align it to the UK’s growth goals.
Firstly, businesses need support to adjust to the “Covid-safe” environment, including operating at less than 100% because of social distancing and potentially lower consumption.
The UK’s bounce back loans and other schemes should help with liquidity. But unemployment is a worry when the furlough scheme ends in October. France is planning to extend its short-time work scheme for up to two years.
Employees can work part-time work but the government tops up their pay so they are full-time employed by their employer. It’s used in other European countries and was why German unemployment did not rise significantly during the 2008 financial crisis. Keeping workers attached to their employers can prevent unemployment from permanently damaging the economy’s growth potential, so it is worth considering by the UK government.
Secondly, there is also the UK’s 2050 net zero goal. Both Germany and France are introducing “cash for clunkers” to incentivise consumers to switch to hybrid or electric vehicles. The fiscal support of consumption can thus be aligned with the UK’s green target, since reducing emissions will require changes in consumer behaviour. So, financial support for consumers can also help with climate goals.
In terms of productivity, this is a long-standing challenge. There’s great uncertainty around the recovery, but restarting the economy without a vaccine or palliative treatment for Covid-19 means that remote working and social distancing will be the norm for some time.
Productivity during this new normal can also be boosted by government policy as well as encouraging businesses to change their norms. For instance, tech investment is needed to make remote working productive. This can be encouraged by fiscal policy measures but also requires businesses to change their working practices.
Services sector output fell by around 20% in April, which was not as severe as manufacturing which was down by abouta quarter or manufacturing which was down by 40%, but was still substantial. It was across all services sectors except for public services, which suggests that remote working isn’t as productive as office-based work for a number of industries. Yet, remote working will be with us for some time so helping remote working be more productive with better digital infrastructure and upskilling workers would be worthwhile to raise productivity.
The changes will be different for different sectors of course. One other trend to note is the growth in e-commerce. Online shopping has held up under lockdown and is likely to become part of the strategy for many more retailers. It was a growing trend before the pandemic, but the social distancing requirements will likely accelerate the need for a number of merchants to consider their online offering.
This will require web capability as well as more payment and delivery capacity. This is another area where government can prompt tech investment as well as improve logistics. For instance, Germany is discussing requiring charging stations at all petrol stations. Green infrastructure and helping businesses with e-commerce would align government spending with longer-term green and productivity goals. With record low borrowing costs, it’s a good time for capital investment by the public sector that could generate greener growth.
Finally, the global market is likely to be volatile as the pandemic works its way through the world. Different countries will impose and relax restrictive measures in accordance with their public health needs. For UK businesses, this will require better information about export markets and diversifying supply chains. Working with trade associations and offering more integrated guidance about global market conditions would help smaller traders in particular.
Undoubtedly there will be many more sector-specific policies that would help restart the economy. By keeping the fiscal support aligned with the UK’s strategic growth aims, it’s possible to restart the economy and become greener and productive in the longer term.
Source: London Business School