The latest data is reasonably consistent with the V shape for recovery from the recession caused by the virus and lockdown, making it a peculiar recession in which government action is the direct major cause, quite unlike the usual recession which occurs beyond its control.
GDP dropped 20% in the second quarter according to yesterday’s ONS release. But what is most interesting in these numbers is that the whole fall took place in April, with May showing a small recovery and June a large one of nearly 10%. These figures suggest that the downturn was about as bad as projected on the basis of simple lockdown arithmetic, with about 20% of the economy closed down. However, this was inevitable, due to simple government coercion. Since lockdown began to be eased, there has been a clear recovery. On the very latest indicators, that has strengthened markedly. Retail sales had fully recovered to 3.4% above year ago levels, according to BRC figures for June. The July flash Markit Purchasing Manager Index is 57.1, with both manufacturing and services well above the 50 mark implying growth. Abroad, the eurozone PMI is at 54.8; the G4 PMI is indicating 2% year-on-year growth. These numbers all indicate a strong bounce back from the lifting of lockdown, as should be expected; the lifting of the cause of recession should also lift the recession.
The lifting of the cause of recession should also lift the recession. – Patrick Minford
Much is made by gloomier forecasters of a possible second wave of the virus, which might be worse than the first. However, recent UK data from the King’s College London ZOE exercise implies that nearly two thirds of the population have had the virus; this should imply widespread immunity and recent studies have found that even among those uninfected by the virus there is a degree of immunity. If so, the measures being taken to prevent new infection spikes should be helped by immunity in much of the population. So far these local measures have indeed succeeded, while infections and deaths from the first general wave are declining steadily. On top of this, there is the likelihood that surviving strains of the virus are less virulent, the worst strains having been eliminated by death and recovery among those they infected; also we should not ignore the likely arrival of a vaccine from the huge research efforts and trials now being conducted. All these arguments point to either no second wave or a much weaker one than the first.
Figures suggest that the downturn was about as bad as projected on the basis of simple lockdown arithmetic. – Patrick Minford
Another cause of forecaster pessimism is the likely rise in unemployment as the furlough scheme comes to an end in October. It is likely unemployment will reach about 8% in the autumn. The Chancellor has announced a “job retention bonus” scheme for employers, to create an incentive for them to keep workers on after the furlough scheme ends. Furthermore, the existing benefit system both provides support for the unemployed and yet more support for those finding work; this underpins the strong incentives in our flexible labour market to create jobs and bring down unemployment, as also occurred in the financial crisis. With demand supported by fiscal expansion and monetary ease, which is already boosting money and credit growth to around 10%, economic growth and new job creation should not be held back by the rise in unemployment.
Putting all these factors together, I am projecting a V-shape for the economy, with Q2 the nadir of the crisis, and a sharp rebound in Q3 and Q4. I expect GDP to have fully recovered by year end.
Patrick Minford CBE is Professor of Applied Economics at Cardiff University.
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