V, W or Nike swoosh? The shape of the economic recovery

Will the UK economy recovery swiftly, like a V shape, or might the recovery be slow and drawn out, like a Nike swoosh? Whatever happens is a £500 voucher redeemable at retail or in the hospitality sector a good idea?

Article updated: 9 July 2020 1:00pm Author: Michael Baxter

The recovery

What letter? The V shape recovery suggests that the economy will soon recover from the Covid crisis, and before we know it, all will be back to normal, the virus crisis like a dimly remembered bad dream.

Recently, the Bank of England’s chief economist, Andrew Haldane, appeared to predict a V-shaped recovery. Now, Andrew Haldane is a brilliant economist and an original thinker. Even so, he has subsequently been forced to clarify and said: “Our economic destiny lies not in the stars but to a significant extent in ourselves, in what policy course we choose.”

For what it is worth I am a fan of Andrew Haldane, but all the same, I think he was too optimistic.

We will probably see a rapid pickup in growth for a while at least; that is an inevitable consequence of the enormous slowdown in economic activity, but the challenge lies with what happens afterwards. When economic output has fallen off a cliff, some form of recovery is a mathematical certainty. And indeed, economic data from around the world in the form of purchasing managers indexes from China to the US, did point to strong growth last month — but growth from a very low level.

The W shape recovery suggests rapid recovery for a while, then another recession (probably caused by a second wave of the virus) and then recovery.

I guess we could also add in a kind of bungee jump shape too. The economy could bounce up and down before finally settling at the bottom.

The Nike swoosh points to a long, drawn out recovery.

Maybe we will get a W/Nike Swoosh hybrid, strong recovery for a while, perhaps clawing back half of lost output, and then the Nike Swoosh takes over, and full recovery takes a long time.

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Public debt

At this point, I think you might find a slight detour into UK public debt interesting.

These figures, which I sourced from a report from Capital Economics, tell a stark story.

Yet its conclusion was not so negative. Thomas Pugh, UK Economist at Capital Economics, said: “While the government may not have to borrow quite as much in the coming months, we still expect borrowing to total £330bn (17.0 per cent of GDP) in 2020/21, over £30bn more than the OBR’s forecast. Even so, against the backdrop of low-interest rates, higher levels of government debt will be manageable. As a result, a prolonged period of austerity won’t necessarily follow this crisis.”

Resolution Foundation

The Resolution Foundation predicts something akin to my W turning into a Nike Swoosh.

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But it says this fate can be avoided. And it suggests a number of policy responses which it believes will create a more robust recovery.

Its ideas include:

  • Slower withdrawal of the Job Retention Scheme for the hardest-hit sectors and other measures, including temporary cuts in employer national insurance contributions.
  • It also wants to see government loans to businesses converted into a new form of debt in which repayments are set at a percentage of revenue and under certain circumstances written off entirely. (So, I guess a bit like student loans.)
  • Create a government voucher worth £500 per adult and £250 per child redeemable in hardest-hit sectors such as retail and hospitality.
  • “Increase investment spending, targeted at projects that would have high social value irrespective of the progress of the virus. These include investments aimed at advancing progress towards zero carbon and improving social and transport infrastructure.”
  • “Prepare for the risks of a second-wave lockdown by aiming for broader, and more equitable, coverage of the Job Retention Scheme, the Self-Employment Income Support Scheme and the social security system.”

It is the voucher system that is grabbing the headlines.

Yesterday it ran a webinar looking at the idea with Ed Miliband and Amber Rudd as speakers. These more professional type of debates often see politicians in a surprising amount of agreement — unlike TV programmes like Question Time, when they are often at each other’s throats.

But Miliband (former leader of Labour Party and now Shadow Business Secretary,) and Amber Rudd (former Home Secretary and in my view still a potential future leader of the Tory Party) reacted positively to the Resolution Foundation suggestion.

The cost of their plan is enormous — between £209 billion and £240 billion, depending on the nature of a second wave of Covid.

But they argue that the cost of not doing this will be even higher.

Thoughts

Amber Rudd said what she liked about the voucher scheme is its simplicity. And I too like that.

Clearly if this voucher went ahead, the impact on retail and hospitality would be enormous — investors should get ready to react if the government looks likely to adopt it.

I do have one observation, however, which I don’t think is garnering enough attention; and that is technology.

Before Covid, adoption of digital technology was too slow. It is always, thus, companies are always reluctant to change how they do things. This crisis is seeing an acceleration towards digital technologies, of which the Zoom economy is just one example.

This acceleration towards digital will lead to advances in productivity. I expect 2021-2022 to see the most rapid increase in productivity seen in the UK in decades.

As part of this, companies that are not good at adopting digital will go bust. Companies that are good at adopting digital will move into the vacuum created by the disappearance of these failed companies.  These digital adopters will grow and create jobs. 

I expect the mid-2020s onwards to also see advances in productivity as the effects of the fourth industrial revolution finally kick-in. The Covid crisis may have the effect of accelerating this shift. 

I worry a tad that too much intervention may negate the need for this digital switch, thus reducing growth in productivity and therefore GDP, later this decade. 
 
On this theme, I’ve got a new book coming out next week called Living in the Age of the Jerk, which looks at how technology is set to change the world. 


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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